Public Bill Committee

[Hugh Bayley in the Chair]

Clause 2  - Regulations to encourage low carbon electricity generation

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: I am pleased to be able to make a few remarks about clause 2, without repeating some of the issues about the amendments that we discussed this morning before we broke up. Those issues notwithstanding, there is much detail that we do not have in relation to contracts for difference. In the absence of the secondary legislation—an issue that we discussed earlier—I want to raise a couple of points for the Minister to respond to this afternoon.
Again, we all will have heard from those who gave evidence to us last week that there are issues and concerns that there is certainly not enough detail available to those seeking to make investment decisions at the moment to give them comfort, predictability and clarity. We know and accept that much of that is because we do not have the secondary legislation. However, as my hon. Friend the Member for Brent North made it clear in an earlier contribution, that degree of information is important, not only for those direct investment decisions but to ensure that in terms of cost the supply chain is in place as soon as possible. The ambitions that I know the Minister and the Government have to reduce costs, particularly off-shore wind costs, are probably largely determined by having the scale, and the scale comes from the supply chain. Obviously trying to maximise the economic impact of those things, just in that one part of the sector, is significant.
There is a level of detail that we are yet to have about the operation of contracts for difference: how they will be allocated; the eligibility criteria; the process for setting the strike price and the reference price, which we will discuss some of when we come to discuss clause 6, although I wanted to flag this issue up now; the contract milestones for each technology type; and the duration of contracts by technology type. So there are a number of issues that I hope the Minister will address in this debate on clause 2.
The Minister will be aware—it is not an allegation or an issue that he is not aware of—of the lack of detail. Indeed, annex A is published alongside the Bill and it noted:
“Although this document sets out the full CfD operational framework”—
that is, the framework for contracts for difference—
“some elements of the design are still being developed”.
Given that the Minister is currently unable to provide much detail of that framework, I wonder if he could give us some indication of which elements of the operational framework are still under development, what progress is being made and when we can expect to see some more of that detail.
I say that because a number of organisations have raised concerns about this issue. Energy UK did so in its written evidence in which it said:
“It is essential that more detail is provided in a number of areas and particularly those where secondary legislation is required, in order that Parliament and the industry are able to provide full and effective scrutiny. The crafting of the detail of contracts for difference and the statutory role of the central counterparty are the prime determinants for ensuring that major investments take place. There are a large number of delegated powers in this Bill and a clearer purpose should be set out for the use of these, particularly in relation to the capacity market. Draft secondary legislation should be published for scrutiny at the earliest possible stage.”
We are obviously aware of the content of the Minister’s letter of 14 January, which indicated that we will not get that detail until this Committee has completed its consideration of the Bill. However, that does not mean that while we are debating the Bill in Committee, the Minister should not seek to provide at least an outline to some of the answers to some of the issues, because they are quite pertinent to some of the concerns and the gaps in the Bill. Even if the detail is not yet available, will he give us a bit more than what his Department has so far been able to regarding direction of travel and consideration? People who are paying close attention to our work in the Committee will find that to be of use.
Regarding the operation of CFDs, will information on any elements of the operation be more fully available by the time the Bill is debated on Report, or will there be an opportunity to scrutinise them in more detail only when the Bill is in another place? CFDs are crucial elements of the Bill. If they are to have the effect that we spoke about earlier today—no doubt we will speak about them again during the course of the rest of today and the Committee’s work—it is important that we have as much information about what is likely to come forward in secondary legislation as early as possible, even if we do not have it in written draft form. I hope that the Minister will be able to respond to those points on clause 2.

John Hayes: The hon. Member for Brent North is in his place, and I want to make some progress before anything further occurs. Let me deal directly with the issues raised by the shadow Minister.
This chapter of the Bill is at the heart of our ambitions for electricity market reform, providing, as has already been said, the mechanisms we believe will deliver that reform, namely the contracts for difference. CFDs are a key plank in the Government’s ambitions and objectives of decarbonising electricity generation at least cost to consumers and delivering the necessary certainty that is a prerequisite for investment to ensure energy security. They will support low-carbon generation, such as renewables, nuclear and carbon capture and storage, driving much needed investment in those technologies. We are committed to the idea of an energy mix, in which those technologies play a vital part.
CFDs will work by stabilising revenues for generators at a fixed price level known as the strike price. Generators will receive revenue from selling their electricity into the market as usual. However, when the market reference price is below the strike price, they will also receive a top-up payment from suppliers for the additional amount. Conversely, if the reference price is above the strike price, the generator must pay back the difference.
Those characteristics mean that CFDs will provide additional benefits when compared with the current renewables obligation. That was confirmed in our evidence session, when Siemens, which has been mentioned already, said:
“On the general point of the Bill, the RO did appear to be working but we all knew that it was not going to work for ever”. ––[Official Report, Energy Public Bill Committee, 17 January 2013; c. 156, Q435.]
The company, as the shadow Minister mentioned before lunch, highlighted the fact that the time has come for a new settlement.
Also in our evidence session, Ofgem said:
“We believe that the CFDs represent a significant improvement on the renewables obligation, in terms of providing value for money to consumers.”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 40, Q130.]
Mindful of Ofgem’s primary statutory responsibility, which is to protect the interest of consumers, that observation is particularly salient.
I think there is a general acceptance across the Committee, confirmed by the shadow Minister’s approach, that the greater certainty CFDs will provide in supporting long-term investment—removing exposure to volatile wholesale prices and protecting consumers from paying for support when electricity prices are high—is welcome. Consequently, CFDs will make the development of low-carbon generation cheaper for both investors and consumers. When assessing which decarbonisation mechanism to adopt my Department established four key criteria against which decarbonisation mechanisms would be judged. These were: cost-effectiveness, coherence with the rest of the reform package, durability and practicality.
From the suite of options we assessed, including fixed FITs, premium FITs and a regulated asset base, the CFD was identified as the support mechanism for low-carbon generation that offered the best balance of results across the four key criteria. Interestingly, the British Chamber of Commerce in written evidence said:
“We support the government preferred choice of the Contracts for difference (CFD) Feed-in Tariff for attracting investment in low carbon forms of energy. The CFD has a number of advantages over other Feed-in Tariff designs that were being considered. As it is a long-term contract it will provide greater revenue certainty; it is less complex than other designs; it provides greater security from price volatility”.
It argues that the CFD reduces commercial risk. It is essential that we do so, because the judgments that are made about investment will balance opportunity against risk, as the Committee recognises.
The assessment suggested that the CFD would be more cost-effective due to lower scope for rents in high electricity price scenarios where generators are likely to pay back, and due to reduced cost of capital that results from removing long-term electricity price exposure and providing long-term revenue certainty. This cost of capital argument is not always made, but it is very important, as we heard from a number of representatives of the sector, for generating sufficient resources to be able to take the long-term view that we all seek.
The hon. Gentleman rightly spoke about the relationship with the supply chain in terms of that long-term vision. The offshore wind developers forum recently published its vision for the UK to be the centre of offshore wind technology and deployment, with a competitive supply chain in the UK, providing over 50% of the content of offshore wind farm projects. I went to meet it recently to discuss that vision, because I think the shadow Minister is right. It is critically important that there is a reverberating effect in terms of the value that supply chain investment brings in terms of jobs and skills. Indeed, the Government are working closely with developers and their subcontractors to help them realise that vision.
It is necessary to identify new opportunities for the sector. There is already growth in the proportion of UK content in offshore wind. The Robin Rigg wind farm, for example, has a UK content of about 32%. I know that there has been concern that that has been slow to take off. That point was made by the Select Committee and others. I am as keen as anyone in this Committee to ensure that we get value from this investment, and I give absolute assurance that the Government will work to try to make that happen.
CFD will be complementary to other elements of the reform package, interacting particularly effectively with the carbon price floor, which will support the transition out of the CFD and towards competition between low-carbon technologies as soon as is possible, and a more resilient and flexible mechanism which will operate effectively in a wider range of scenarios and can deal with unanticipated outcomes on carbon prices, fossil fuel prices or technology costs. Finally, we looked at the ability to provide more certainty that carbon targets will be met than with other mechanisms, because the impact of uncertain future wholesale prices is removed in favour of predictable pricing.
For all of those reasons we opted for the CFD. As I said, it seems to have been warmly welcomed by most of the witnesses we met in the earlier stages of this consideration. It would be fair to say, given the analysis of the Select Committee at the pre-legislative scrutiny stage, there has been a growing emergence of a broad consensus—I will not say a wholesale consensus—that this is the right way forward.
However, the details of the design matter. The hon. Gentleman raised the important issue of providing more detail at the earliest possible opportunity. I hear what he says. We intend to bring forward more information during the course of the consideration of the Bill, as he knows. Of course, the Bill will be considered both in this House and the other place. I can tell that the hon. Gentleman is anxious to ensure that is early rather than late. He has made the sensible suggestion that, if in my letter I have argued there are elements that we need to firm up, it is not unreasonable for me to say what those elements are, at least by type if not in greater detail. I will certainly go away and take a fresh look at that as a result of the point he made on that matter.
The hon. Member for Brent North, an old friend, is scrutinising me personally. Since the Wolsey and Henry VIII thing developed, I can tell our relationship is going to grow ever tighter. Was the hon. Gentleman indicating that he wanted to intervene or was he just listening to me very intently?

Barry Gardiner: I am just paying attention.

John Hayes: No, he is not going to intervene. That is good. I did not want in any sense to keep him waiting.
The clause sets out the power of the Secretary of State to make regulations bringing the CFD into effect, as the shadow Minister said. The regulations will include provisions about the terms of the CFD to be offered, which low carbon generation will be eligible to receive the offer of contract, and how such offers will be allocated by the systems operator—National Grid—and the Secretary of State.
The regulations will contain controls over the CFD counterparty, which will be established to enter into bilateral contracts with eligible operators. They will also contain provision for a supplier obligation that will require licensed electricity suppliers to enable the funding of the CFD counterparty.
While we might have liked to include all, or much greater, detail of the workings of the CFD in the Bill, we do not think it is appropriate and, indeed, the shadow Minister recognises that not all of this can be in the Bill and understands that some of this will come later. For the sake of clarity, so that he does not think I misunderstood, I appreciate that he is not saying that it needs to be here in the Bill. He is saying that the information needs to be available to all of those who want to scrutinise the Bill. That seems to be a different and much fairer point.
We believe that many of the generic CFD terms are not intended to change substantially. The terms will be extremely detailed, as the hon. Gentleman acknowledged, representing long-term commercial contracts, and are likely to require amendment over time. Flexibility is therefore needed to ensure that the market changes can be reflected in future.
That gives me the opportunity to make a more general point about the Bill, though highly relevant to the clause. It is again part of the balance that we intend to strike—I spoke earlier of a different aspect of that balance—that we produce a Bill sufficiently certain to produce clarity sufficient to encourage investment, but sufficiently flexible to respond to changing circumstances. Our attempt has been to construct that.
Let me say something that a Minister almost never says in such a Committee. No Act looks exactly like the Bill that came at its genesis. Of course, we would expect in those areas, having broadly agreed both the objectives and the mechanisms, refinements to be made through scrutiny. It would be a very poor Minister who did not acknowledge that, and I am grateful, therefore, for the tone once again of the remarks that have been made this afternoon.
We believe that regulation is the most appropriate vehicle, allowing timely response to changes in circumstances that may not be possible through primary legislation, while ensuring appropriate levels of parliamentary scrutiny—the point made by the hon. Gentleman. Indeed, to date that has been the approach adopted by the current renewables support system, the renewables obligation. In order to provide the detail necessary for industry to access the CFD ahead of making regulations, my Department has recently published an operational framework and a detailed heads of terms for the future contract. I mentioned them both a few moments ago. Those are again, it is fair to say, are largely warmly welcomed by the sector, and have addressed issues raised by the Select Committee, which, while agreeing with the general principles that we adopted, had some specific points about some of the detail. We have listened and tried to take them on board.
Those overtures have been of immense assistance in helping to provide greater clarity and are very welcome. We will continue to work with Parliament, industry, consumer representatives and others as we develop the technical detail for the final contract and the secondary legislation.
The following clauses, under chapter 2, set out further detail on how the CFD will be implemented and we will discuss those in more detail as we progress, but this clause provides the backbone of the CFD. I have spoken at some length to put an overview of this core element of the Bill on the record. As I said earlier, the CFD is one of the principal elements in the Bill, which gives life—or energy, if I might say so—to the reforms. With that background, I beg to move that the clause stand part of the Bill.

Alan Whitehead: The clause deals very generally with the question of the establishment of CFDs. The phrase “very generally” is correctly used, in the sense that the clause is incredibly general and schematic. Although there are opportunities within the clause to develop the regulation that will be necessary to give life and shape to CFDs, I have to place it on the record that, unless the detail that turns up subsequently is efficient in every respect, the extremely skeletal nature of what is in the clause relating to CFDs will possibly come back to haunt us. The Government might have specified how they will do things relating to CFDs rather better at an earlier stage in the development of the Bill.
I want to draw attention to several areas that I hope will be defined effectively by regulations, and also to some areas relating to CFDs that are outside the scope of regulation—indeed, they are outside the scope of the Minister’s Department—but have a fundamental bearing on how CFDs move forward. I hope those areas will be incorporated in the regulations in the best way possible. At the time of the draft legislation, there was consideration as to whether there should be CFDs, as opposed to a premium FIT. A substantial discussion—in the annex material to the draft legislation—came down on the side of a CFD. The impact assessment to the 2011 EMR White Paper said:
“A FiT CfD…. insulates generators and consumers from both short-term volatility and the impacts of long-term price trends; higher- or lower-than expected gas prices have no effect on price received by the generator or bills paid by consumers. This means that consumers will be shielded from longer-term wholesale price increases, but also that they will not gain from longer-term wholesale price decreases. Changes in wholesale prices only affect the amount of support paid out by Government”.
That makes the case for the stability of a CFD over a period of time. The sting, however, is in the final clause in that paragraph of the impact assessment, which is
“hence the price risk is borne by Government balance sheets.”
That is where a number of the problems relating to CFDs and their development originally arose. The Government’s original intention at the time of that impact assessment was clearly to place the development and onus of CFDs, eventually, firmly on Government balance sheets. Except they did not: that intention disappeared pretty quickly after the impact assessment on the White Paper originally came out. We then had proposals for multiparty CFDs; a variety of interesting semi-exotic animals charged through the undergrowth masquerading as new forms of CFDs. The Select Committee very rightly said that that would not wash; that those ideas would not work and a single counterparty, underwritten, essentially, by Government, would clearly be the way to make CFDs work overall.
Later in the Committee’s scrutiny of the Bill we will debate whether that aim has actually been reached in terms of where we now stand in relation to CFDs. It is certainly a concern of a number of Opposition Members that the Government’s apparently clear intention that there will be a single counterparty seems to differ somewhat from the wording in the Bill, in terms of whether we will effectively be back to where we were, albeit without formal Government balance sheet backing, at the time of the draft legislation and White Paper.
The second concern is about how the CFD mechanisms will work in terms of their availability to those who wish to take them up. We are bound not only by measures that could be resolved by regulation—for example, allying investment instruments, and the availability of CFDs that arise from them, with the procedure for the subsequent allocation and auction of CFDs in the general arrangements that I hope will follow under regulation in this clause. We are bound by a matter that is, quite seriously, outside the scope of regulation to resolve, which is the levy control framework that will eventually underpin the overall allocation of CFDs.
If we have a levy control framework that stands above the arrangements for allocation and auction by limiting what can be allocated or auctioned, or, indeed, by limiting what can come in an investment instrument, the certainty that is being engendered by the implementation of CFDs will pretty much be swept away, because it will be very difficult for those who are contemplating obtaining them to be certain that they will get one. That may be because the effective pre-allocation of CFDs may swamp the pool for the particular year from which someone thinks they want it to start in terms of their own generation. Alternatively, the levy control framework relating to the allocation of CFDs may mean that effectively there will be rationing of CFDs, even in an auction market, once the process is under way.
It is important for regulation to ensure, as far as possible, that there is confidence, so that if someone is going for a CFD, they get the CFD that they think they are going for, and they get the CFD that they think they are going for to the extent that they think they are going for it at the time they thought that they were going for it. If none of those conditions can be met by reasonable regulation and, I suspect, substantial discussion further than regulation in the context of how the levy control framework will work concerning CFDs, many of the advantages of CFDs that I have just read out from the impact assessment will simply dribble away.
Most important, in the evidence that was put forward at the time of the impact assessment, CFDs were estimated to reduce the costs of capital very substantially for those investing over a period of time—by £2 billion or so compared with premium FITs—and were therefore good value overall, and much better value than premium FITs in terms of the overall amount of money that would go in, as implied by the levy control mechanism, through imputed tax and spend over a period. They would therefore be better value in terms of the amount of money that would eventually land in consumer bills as a result of underpinning CFDs in the long term.
However, if we do not get the question of the counterparty right, if we do not get the question of allocations right, and if we do not get the question of rationing and auctions right, then it will not reduce the cost of capital over a period, and all those calculations in the impact assessment at the time of the White Paper will turn out to be null and void, and CFDs will not turn out to be a better deal than would have been the case for other forms of FIT after all. If that is an outcome from the very sketchy arrangements here, we will live to regret that we went along the path of CFDs in the first place.
That is why I think—I join my colleagues in this respect—it is essential that regulation is as clear, as early, as explicit and as determined as possible to resolve a number of the issues that come in front of us. We will get only one go at that, because if we do not resolve those issues early, we will have lost for ever the advantage that the CFDs may give us in providing the stimulus for new investment at a relatively low cost of capital, and certainty for that investment ahead.
Those are the merits of CFDs, and we throw those merits away at our peril. I hope that we do not do that, and that at an early stage, subsequent to this chapter being adopted as part of an energy Act, we do not think, “We’ve done the job, we can stop now.” The job will only just have begun, and we must make sure that they work as well as they can so that the results end up as good as they can be, and do not lead to a disastrous decline in investment because of the uncertainty that the failure to act might engender.

Barry Gardiner: This clause is indeed a critical centrepiece of the Bill. In many respects, it is the Government’s free market answer to a question that is increasingly being asked in industry: why do we not just have, as with water, a regulated asset base and a regulated rate of return? In many respects, that would make a lot of sense for someone who did not believe that the introduction of competition would drive down price through this mechanism, and did not want to give free rein to the market to be the tool to do that.
The questions that my hon. Friend the Member for Southampton, Test posed to the Minister are critical, because at the moment there is no clear answer that industry can see to the question: why are we not just a regulated utility with a regulated rate of return? This morning, the Minister waxed eloquently about the contract for difference that is being negotiated at Hinkley. We all know that the strike price will be based on a reasonable return on the cost of capital and the estimated cost of construction, and so it will be for many of the nuclear projects that the Government want to come into play.
It is deeply worrying that there are fundamental questions that the Government are not in a position to answer, but to which they gave initial answers that they have had to chop and change. That shows that they do not have a clear line of sight on their own policy. As my hon. Friend said, the Government were originally clear that this would be on the balance sheet. The Minister referred in his opening remarks this afternoon—I am glad to say that I caught the tail end of them—to the importance of giving investors the security that that would provide, but that has not happened. It is difficult to see, but let me be generous about the way in which the Government have changed their mind. They have listened to some of the arguments that industry has come up with. They have looked at the levy control framework and realised the problems that were going to be created when companies reached that point of making a final investment decision but found the Government saying, “Sorry, we have used up the funds and there ain’t any more left. Come back and see us in 18 months or in two years’ time.” They have taken that on and they have tried to patch and mend what they have proposed to account for that. But these patches are workarounds for fundamental problems that are associated with this method of contract for energy supply.
When I originally looked at this Bill, I thought that perhaps it was a good thing that not everything was in the Bill, because at least it gave us time to get it right. The more time has gone on, the less confidence we have that there is the clear-sightedness that will make contracts for difference work.
My hon. Friend the Member for Southampton, Test has exposed some fundamental flaws. He has talked about allocation and the levy control framework. The Minister here must have absolute confidence that this will be the best way, not just a possible way, of ensuring that we get the investment in our energy infrastructure that we need. To do that, clarity is required. I am talking about not in a month’s time or when the Bill comes back for consideration by the House of Lords, as was implied by the Minister earlier, but weeks or months ago. We need clarity for industry about the basis on which they will make their investment decisions. I am sorry, but that clarity is not here in clause 2.

John Hayes: I will respond briefly, if I may, because the Opposition have raised an important point and they deserve an answer. It is important to say to the hon. Members for Southampton, Test and for Brent North that it is true that our long-term vision is to move to a more market responsive and more market driven system. The hon. Member for Brent North talked about the market playing its part in shaping supply to meet demand. The reason for that, by the way, is not—I speak for myself here and not for all of my hon. Friends—any doctrinaire interest in economic liberalism; I have no such interest. It is merely because the best mechanism for dealing with an extraordinarily dynamic set of circumstances and a high level of unpredictability is to create as much responsiveness in the system as possible. If that is our objective, both hon. Gentlemen are right and it does imply a decreasing role for Government and a transition to a market in which low-carbon technologies can compete fairly on price.
As the hon. Member for Southampton, Test said, this is the beginning of a journey and not the end; I am paraphrasing, but I think that was the sense of what he said, and I entirely agree. I acknowledge that it would not be appropriate to have a long or wide-ranging debate about the route that might be taken by different technologies, but we expect prices to fall as a result of scale, and greater competitive pressure to emerge as a result of the framework that the Bill establishes. That competition is designed to drive down costs and allow us to meet our objectives in the most cost-effective way; the hon. Gentleman is right about that. In a sense, that is why to identify now the proportion of the levy control framework that will go to each and every technology would be out of sympathy with that long-term objective.
It is true that there are a variety of means by which we may achieve our aim, and the hon. Gentleman knows that they include nuclear and carbon capture and storage. I am a great enthusiast for carbon capture and storage, as is the shadow Minister. We had exchanges on some of the detail and will continue to do so, but we are both committed to the idea that carbon capture and storage can make gas and, indeed, coal a source of energy for the future. We would hardly be backing a CCS project on coal if we did not think that. We have shortlisted projects and coal is one of the options.
The hon. Gentleman is right to raise the issue of market sensitivity and responsiveness. It is central to our ambitions, and I do not think in any way that the proposals before the Committee and in the Bill inhibit that direction of travel. Far from it.

Alan Whitehead: With examples springing to mind in terms of how CFDs may work in the context of the levy control framework, we do not yet know whether demand-side reduction will be included in the levy control framework because proposals are yet to come forward to us or anybody else. We do not know the relationship between the strike price and the amount of new investment that can be undertaken through the levy control framework. We do not know, subject to efficiencies, the extent of cumulative costs that will arise in the levy control framework that will, therefore, inhibit the amount of new entrants that can come in through the framework and gain new CFDs. We know none of those things, yet we are proceeding, effectively, as if we did. That causes many people—me included—considerable concern. I hope the Minister can address it.

John Hayes: Is the levy control framework, in the state that the hon. Gentleman described, hindering investment? I would say no. We have already seen clear commitment, particularly in renewables, to long-term investment. I have mentioned the welcome that the changes in both the Bill and the LCF settlement received from a wide range of organisations. It is important that we protect the interests of both consumers and investors, and he will accept that a balance needs to be struck.
I do not think that there is evidence to suggest that the arrangements currently in place inhibit investment, but without putting words into the hon. Gentleman’s mouth, the question for me is whether these measures are likely to stimulate investment. My argument is that yes, they are. They are best explained as part of a journey to a destination that both the hon. Gentleman and I seek. It is important to say that the Bill is not about fixing a long-term vision. The curious thing is that that means that it is good not to be too specific in the Bill, for that would bind the hands not only of this Government but of future Governments, were we to be so. Again, it is about balance and nuance; it is about trying to strike the right balance, but I see the Bill and electricity market reform providing the tools for a transition to a more market-driven system and providing necessary support to the low-carbon technologies that will enable them to get both a level of maturity and the ability to compete on a level playing field with fossil fuels, while simultaneously delivering security of supply in the short, medium and long term.

Ian Lavery: Would CFDs be applicable to the Hatfield CCS project?

John Hayes: That is an interesting question, and while I seek further inspiration, I say to the hon. Gentleman that in a Freudian way I was about to describe him as my hon. Friend when he rose; I do not say that to embarrass him. I think it could have damned both of us politically but it is indicative of my admiration for him.
What is certainly true is that in terms of the continuing debate about demand reduction—I cannot say too much about that as it is part of the consultation and I do not want to anticipate the outcome—the measures suggested through the consultation, which the Government will consider and take on board, should interface coherently with the proposals before the Committee and the House. That applies to this part of the Bill and to the capacity mechanism that we will discuss in due course. It is absolutely right that as further proposals come forward as a result of consultations, they fit with these proposals in the way that the hon. Member for Southampton, Test made clear in his remarks.
The answer is yes, I am pleased to say. Inspiration has reached me. If the hon. Member for Wansbeck has any further queries, rather than seeking further inspiration and delaying our consideration unduly, I would be more than happy to exchange further information in dialogue with him, either formally or informally. That is the spirit in which I intend to conduct all our affairs, Mr Bayley, as I hope you will appreciate.
Is there too much detail here? Is there too little detail here? That seems to be the charge. It is reasonable to say that we have tried to retain sufficient flexibility while establishing a framework that guarantees certainty. It is reasonable to argue that it means we need to make more information available to allow people to chart that certainty. It is certainly reasonable to argue that this is the beginning of a process rather than the end, the start of a journey rather than a destination. I could talk at length about why we chose CFDs over other options. The hon. Member for Southampton, Test alluded to it. The hon. Member for Brent North is also very familiar with the debate. Indeed, he began to speak about the Select Committee’s perspective, and the early discussions that took place following the White Paper.
There have been a lot of debates about different feed-in tariffs and the effects they would have. I will not tire the Committee by going through them exhaustively. I remain convinced, having tested some of the arguments myself as a new Minister in September, that this is the right way forward. I came with no pro-CFD prejudice, no pro-capacity mechanism prejudice, and no fixed view about this at all. I came with an open mind and I wanted to test all these matters. That is one of the advantages of being a new Minister. I cannot speak for what happened before me, but I can speak for the fact that I would not be standing before the Committee if I was not convinced that this was the best way forward.
I want to respond properly to the contribution made by the hon. Member for Brent North. He raised one other matter: the issue of the counterparty body. He generously acknowledged that the Government had moved their position on the basis of pre-legislative scrutiny—I have the Select Committee analysis here—to a single counterparty. Let me be clear: a CFD will be and can only be a contract between a single counterparty and a single generator. We listened to the Select Committee. Industry, frankly, made the same point. It was concerned that there would be a bureaucratic process, a cumbersome process, a costly process and so on. Industry and the Select Committee had a consistent view. If an organisation now has a CFD it will know that it has one counterparty to deal with.
It is true that the Bill provides for an orderly transfer to a new counterparty should that be necessary, with the possibility of overlap. We talked earlier about some of the transition arrangements, but there is no doubt about our intent or purpose in developing that relationship between the body that contracts and the counterparty. I wanted to affirm that once again, so that it is clearly on the record in Committee. In that spirit and in that way, so that we can move on, ever upwards, I urge the Committee to accept the clause.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.

Clause 3  - Designation of a CFD counterparty

Tom Greatrex: I beg to move amendment 32, in clause3,page3,line7,leave out ‘an’ and insert ‘a single’.

Hugh Bayley: With this it will be convenient to discuss the following:
Amendment 33, in clause3,page3,line15,leave out ‘More than one’ and insert ‘Only one’.
Amendment 34, in clause3,page3,line20,leave out ‘28’ and insert ‘90’.
Amendment 35, in clause3,page3,line23,at end insert—
‘( ) Regulations must include provision about the period of time during which no designation has effect under this section.’.
Amendment 36,page96,line5 [Schedule 1], leave out ‘one or more schemes’ and insert ‘a scheme’.
Amendment 41, in clause6,page4,line42,leave out ‘a’ and insert ‘the’.
Amendment 53, in clause13,page8,leave out lines 5 and 6.

Tom Greatrex: I will speak to amendments 32 to 35 and only make a couple of remarks about amendments 36, 41 and 53. All the amendments in the group are similar and designed to clarify the issue that the Minister touched on in response to some of the points made by my hon. Friends the Members for Southampton, Test and for Brent North on clause 2—on the status of the counterparty and the single counterparty. The amendments were tabled to provide investors with certainty and clarity and to respond to some of the points that we heard during our evidence sessions last week.
Great play has been made by the Government about how they responded to the concerns of industry and the Select Committee. The Minister did so again a few moments ago by moving from the previously envisaged multiple counterparty model, as in the draft Bill, to a single counterparty in the Bill before us. It is right and appropriate, however, to note that getting to that point has been a long and sometimes convoluted—to use the Minister’s phraseology—journey.
As many Members present are aware, given their involvement in the Select Committee and their previous interest in energy policy, the Government originally proposed a single counterparty, with the risk backed by Government balance sheets. Many are familiar with paragraph 100 of the 2011 impact assessment, which stated that the feed-in tariff contract for difference
“insulates generators and consumers from both short-term volatility and the impacts of long-term price trends; higher- or lower-than expected gas prices have no effect on price received by the generator or bills paid by consumers. This means that consumers will be shielded from longer-term wholesale price increases, but also that they will not gain from longer-term wholesale price decreases. Changes in wholesale prices only affect the amount of support paid out by Government; hence the price risk is borne by Government balance sheets.”
That, understandably, led investors and industry to believe that a single counterparty model, with the risk borne by the Government balance sheets, was being proposed.
Select Committee members probably recall that John McElroy of RWE made that point in pre-legislative scrutiny. He said:
“I would have to say clearly the original consultation and what was set out in that with regards to the Contract for Difference was quite important in the sense that the Government as the counterparty underwriting the contract in some way and the nature of the risks associated with these large low carbon projects, that we saw Government’s role in this as important in terms of reducing the cost of capital. Now that Government seems to be trying to push its involvement in these contracts away from itself, partly driven by Treasury constraints, partly driven by the State aid rules, inevitably that claimed cost of capital benefit is not there.”
When the Minister referred to the change of course in response to pre-legislative scrutiny, I am sure that that was the point made loudly, clearly and repeatedly to him, to his predecessor and to his Department by industry as well as by the Select Committee. I note that the Minister is looking at the Select Committee report as we speak. He will note that it described the Government’s claim that the drafting in the White Paper’s impact assessment was “a little bit unfortunate” as
“disingenuous to say the least.”
When the Bill was published later last year, we were presented with what Ministers described as a single counterparty model. The Minister spoke about it this afternoon. It is also the case that the Government’s stated policy intention on the counterparty is different from provisions in the Bill and it is those that the amendments seek to address. Although Ministers are clear that they have listened to the concerns and have changed from a multiparty counterparty model in the draft Bill to a single counterparty, the wording still allows for a multiparty counterparty. There is also concern that people may be unaware of that, as we heard last week. They read the policy, but not the Bill itself, as Keith MacLean, from SSE, put it during his oral evidence last week.
When I pressed the Secretary of State on this point in the evidence session, he reiterated the Government’s policy intent:
“Well, the policy that we have set out when we publish the Bill is that it will be a single counterparty model. We are not planning to set that body up to go to a multiparty model”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 11, Q20.]
The point is that before the summer, at the time of the publication of the draft Bill, the opposite was the case. At that time, as the pre-legislative scrutiny evidence alluded to, there may well have been other pressures from other Departments and the Government took a view that a multiparty counterparty was the best option. Perhaps at that point it was the only option left open to the Department to propose. The reason why I make that point is that it indicates a significant change in Government intent, from a single counterparty model backed by the Government, to a multiparty model and now back again to a single counterparty model. Any ambiguity in the drafting of the legislation is therefore significant, because it means that as we heard last week, there are concerns that at some point there may be another shift. The Government may wish to go back to a multiparty counterparty model, and that option is therefore available to them in the way the Bill is drafted.
The Minister picked up on that point last week after I had raised it with a number of our witnesses, particularly on the first day. He wrote to Committee members on 16 January and confirmed that the option to have more than one counterparty remains open in the Bill, but it is only for emergency use. I quote from the letter:
“For the avoidance of doubt, the Bill does not allow there to be a multiparty CFD counterparty. A CFD is defined as ‘a contract which a CFD counterparty is required to enter into by virtue of section 6’. If this were intended to cover a contract to which multiple counterparties were required to enter into collectively, the Bill would have to say so explicitly.
In addition, it is not the Government’s intention to have more than one CFD counterparty. Nonetheless, the Bill must provide for the highly unlikely scenario that the counterparty is not considered adequate or effective. In such a scenario, the Secretary of State would require the ability to quickly transfer contracts and ensure access to supplier obligation payments to a new counterparty. To minimise any delay that could arise between un-designating one company and designating another, Clause 3 of the Bill allows for more than one designation to have effect so that designations may overlap. Any new CFD counterparty would enjoy the same powers to raise funds from suppliers to meet its liabilities (both under new contracts, and those that had been transferred to it).”
While it is understandable that Ministers would be quickly able to resolve problems with the counterparty, the drafting of the Bill still indicates a degree of uncertainty, about which we have heard some nervousness, from Dr Keith MacLean from SSE and others during that sitting. I have also discussed the issue with Energy UK, which also outlined concern about whether the counterparty is a single entity or not. Some of the amendments simply change “a” to “the” and may appear minor, perhaps even pedantic, if taken out of context. However they go to the very heart of one of the central purposes of the Bill, which is to provide investors with the necessary long-term certainty to allow them to have confidence when investing in the UK. That is why I tabled the amendments, and why I ask the Minister to consider them. They would send a clear, unambiguous signal to investors that the policy intent, as published by various Departments and as made clear by the Minister and the Secretary of State over recent weeks, is absolutely explicit and clear and backed up in the Bill.
Amendment 34 is designed to increase investor certainty. Allowing only 28 days’ notice when withdrawing as a counterparty is bad for investor certainty; it is too short a period. Our amendment would increase the notice period to 90 days, or three months, which is more appropriate, and would allow investors sufficient time to adjust to any new arrangements. When they were making an investment they would know that they had enough time to adjust in the event of a change. Like the other amendments, amendment 34 is offered in the spirit of seeking to improve and provide clarity to the Bill.
As has been widely acknowledged, the single counterparty model is a significant development from the draft Bill. It is largely viewed positively. It is particularly significant in reference to our earlier discussions around reduction of risk and therefore maintaining as low as possible capital cost, but it needs to be absolutely explicit. I therefore ask the Minister to consider this group of amendments.

John Hayes: The shadow Minister is nothing if not consistent. He has already made this case in the evidence sessions with enthusiasm and purpose, and he does so again today.
If an observer were to reach a conclusion about the relationship between the parties in the Committee on the evidence so far this morning and in the early part of this afternoon, they might make the mistake of believing that it was cosy. It is not cosy; it is mutually respectful. I would go so far as to say affectionate. It is certainly based on due regard for the expertise that exists across the Committee, but let it never be said that it is cosy. It is part of the joy of our polity—the delight of this Parliament—that we can have civilised debate and sometimes strongly disagree, and I strongly disagree with the hon. Gentleman on this point. I will explain why.
First, a history lesson, or rather not a lesson because the hon. Gentleman actually made the point himself. He gave us a lesson, but he was right to do so. As he rightly said, the Select Committee did look at the matter in some detail and was critical of the Government’s original proposals.
The Energy and Climate Change Committee stated that the evidence suggested very strongly that a multiparty proposal was not workable. They cited Centrica and EDF, who supported the alternative; a simpler, more straightforward system. As members of that Committee present here will know, they went on to state:
“We recommend that the Government abandons the multiparty concept and reverts to a single counterparty payment model, with a contract and counterparty design that is legally enforceable.”
We are clear about the genesis. There was consideration of alternative models, we listened to what the industry and the Select Committee said, we reconsidered, and we decided to focus our attentions on precisely what was recommended by the Select Committee and others. Therefore, the Bill says very clearly in this part:
“A contract for difference is a contract…certain payments under which are to be funded by electricity suppliers (see further section 5), and…which a CFD counterparty is required to enter into by virtue of section 6.”
As the hon. Gentleman mentioned, I referenced that provision in the letter I sent last week, which he kindly drew to the Committee’s attention. When he raised those matters in the evidence session I wrote to the Committee to make our position clear.
For the avoidance of doubt, I asked for further advice, because I respect the hon. Gentleman’s view; I am advised that it is impossible to have a multiparty counterparty in the Bill as drafted. The Bill cannot give rise to that eventuality. It is true that it makes provisions to change the counterparty should that become necessary, but it does not make provisions for a multiparty counterparty as originally envisaged in the draft Bill and as I said, we were criticised by the Select Committee. This opportunity to affirm that is not merely an affirmation of our intention or our policy; it is an affirmation of the character of the proposed legislation, the detail of which I draw to the Committee’s attention.
Amendments 32 and 33 limit the ability of the Secretary of State so that he can designate only a single counterparty at any one time. Given what I said—that the Bill does not allow for a multiparty CFD counterparty—we obviously believe that the amendments are unnecessary. The multiparty payment model is one that would have a generator at one end of a contract and suppliers at the other. We ruled that out, as the Bill makes clear.
As I said, a CFD is defined as a contract with a CFD counterparty. If that were intended to cover a contract that multiple counterparties were required to enter into collectively, the Bill would have to say it explicitly. The hon. Gentleman said that. It reflects what I put in my letter.
 Barry Gardiner  rose—
 Dr Whitehead  rose—

John Hayes: Two members of the Committee want to intervene, but I saw the hon. Gentleman first.

Alan Whitehead: The onus is on the Minister to explain carefully why the wording in the clause differs so much from the plain intention that I accept he sincerely set out this afternoon. The phrase,
“More than one designation may have effect under this section”,
is difficult to read, except in the context of
“More than one designation may have effect under this section.”
If the Minister is saying that it does not mean that, but that it means that only one designation may have effect under this section, perhaps he will tell us how that happens. I have read the sentence many times, turned it upside down and read it back to front, and it still means the same. I cannot quite get round that.

John Hayes: It is indicative of the breadth of the hon. Gentleman’s learning that he can read in all directions, probably simultaneously, although I would not want to ascribe that to him unless he claims it himself. The essence of the issue is what the Bill does and does not say. To bring about the type of arrangement that the hon. Gentleman describes, clause 2(2)(b) would have to say “which a counterparty or one or more counterparties is required to enter into.” It would have to suggest explicitly that there could be a plural rather than a singular arrangement, but the clause explicitly states that the arrangement is singular.
 Mr Robert Buckland (South Swindon) (Con) rose—

John Hayes: Forgive me—I do not mean my hon. Friend any discourtesy, and I will happily give way to him, but I said I would give way to the hon. Gentleman first, and I do not want to be discourteous.

Barry Gardiner: I am very grateful to the Minister. Nobody would dream of accusing him of discourtesy. Let us look at the matter from another perspective. We talked about a single counterparty and a multiparty counterparty, but does the Minister accept that even if he retains his view, contrary to the opinion of my hon. Friend the Member for Southampton, Test, which I share, the Bill allows only a single counterparty for any one contract? None the less, it could allow multiple counterparties that are single counterparties for a number of contracts. That is incontrovertible as it stands. If the Minister wants such flexibility in the Bill, he should be explicit about it. If his officials want it snuck in, he should be clear about whether he is letting them.

John Hayes: That is not the intention. The hon. Gentleman is right that I am firm about ensuring that the Government’s intention is shared by all associated with the generation of the Bill, because he will know that parliamentary draftsmen play a critical role in the process. The only circumstances in which the eventuality he describes might arise are those I have already set out, where an extreme case needs a change counterparty for a period of transfer from one body to another. That is perhaps where we differ. I do not think it is a difference in principle or essence; it may be a difference about drafting. As a Minister, I am reliant on the draftsmen, but I am absolutely clear that it is both policy and what I understand by the Bill. I have gone back and checked it again as a result of the shadow Minister’s overtures.

Robert Buckland: I listened very carefully to the Minister’s description of clause 2(2)(b). In clause 2(3) I read that
“‘CFD counterparty’ is to be construed in accordance with section 3(2)”.
Clause 3(2) states:
“A person designated under this section is referred to in this Chapter.”
Is my hon. Friend saying that, for a multiparty counterparty to be possible, it should state “a person or persons”? That would throw open the possibility of more than one party being involved.

John Hayes: I am grateful to my hon. Friend, because I am saying exactly that. The use of the singular is as clear an indication as there can be in legislative terms that that is precisely what is meant. He has identified a further example of the singular in those terms. The hon. Member for Brent North is expressing legitimate concerns, but, despite our warm relationship, he is wrong.

Barry Gardiner: The Minister is right to say that we both share the same objective; we just want to ensure that it is in the Bill. My contribution is in the spirit of co-operation, not in the spirit of criticism. I understand why he might wish to maintain, as clause 3(1) states, that the Secretary of State
“may by order made by statutory instrument designate an eligible person to be a counterparty.”
In the Minister’s view, that means a single eligible person and brooks no other. One can then read subsection (2), which states:
“A person designated under this section is referred to in this Chapter as a ‘CFD counterparty’.”
If that is read in conjunction with subsection (5), which states:
“More than one designation may have effect under this section”,
we have the possibility that the Secretary of State can make more than one designation. The references in this chapter are to “a CFD counterparty” because there is not “the CFD counterparty”. If the Minister really wishes to avoid doubt in the Bill, clause 3(2) should say “the CFD counterparty”, not “a CFD counterparty”.

John Hayes: Semantics are often underrated, particularly when it comes to the detail of legislation, and the hon. Gentleman makes an interesting semantic point. I use the prefix so that he would not assume that that was pejorative. I will certainly look at that, but the Bill is framed in the singular, the intentions are on the record and as clear as crystal and any mention of the plural is absent. We have seen the phrase “one or more”, or some such parliamentary draftsman’s phrase, a hundred times when meaning a number of bodies. I do not want to use this term again, because to use the same term more than twice becomes tedious, but I worry about pins and dancing and the possibility of the two coinciding.

Tom Greatrex: I may be about to prove the Minister’s point and dance on the head of a pin, but will he explain to the Committee the difference between “one or more” and “more than one”?

John Hayes: Now we really are up a semantic avenue that I could not have reasonably anticipated when I prepared my notes for this afternoon. The real issue here is that it is correct that there can be more than one counterparty, but, as we have said, they would be single counterparties. We have explained that that is only in the circumstances where they would overlap during the transfer that I mentioned earlier. If an extreme circumstance arose where the counterparty body was changed, there might be a need for an overlap, but that is neither the core purpose nor the intention of this part of the Bill. Were that the case, it would be drafted in an entirely different way.

Barry Gardiner: The Minister has accepted that it is possible to have more than one counterparty at the same time. He said quite clearly that he envisages that that could happen only when one party was giving up and another was being appointed. However, that is simply the limit of the Minister’s imagination. It is not what is in the statute. He cannot see any other circumstances in which that would happen, but the law would allow it. The law would allow it if they chose to have multiple single-party counterparties. That is what we are trying to clarify and amend by the proposals.
 Dr Whitehead  rose—

John Hayes: I had better give way to the hon. Gentleman, so that I can deal with two in one.

Alan Whitehead: Setting aside the fact that schedule 3 appears to contain a separate counterparty for investment instruments, which makes two counterparties to start with, clause 2 clearly points out the difference. Clause 2(1) refers to contracts for difference—plural—and clause 2(2) refers to a contract for difference. There is a fundamental distinction between the two subsections. One deals with the generality of contracts for difference and the other deals with a specific contract for difference. In clause 2(1), it is required that a CFS counterparty enter into a specific contract for difference
“by virtue of section 6”.
That is a contract for difference.
So, according to the legislation, it is perfectly possible for each contract for difference to have only one counterparty for that contract, but multiple counterparties for contracts for difference overall. We already have two. The legislation makes it possible to have a number more, according to that interpretation. This is not an angel on a pinhead point. It is serious. It is essential to get it right. Otherwise, we are in for a lawyer’s paradise as far as CFDs are concerned.

John Hayes: Yes, it is true that in different parts of the legislation contracts for difference are described in different ways, but the difference between contracts for difference and the counterparty body is that there will of course be more than one contract for difference, as the hon. Gentleman acknowledges. At some points in the Bill, they are therefore described in the plural. That is perfectly understandable.
The counterparty body, however, which the Govt intend to establish is designed to be a single body as a result of the changes under the Bill. The conflation that is happening, which I do not believe is mischievous in any way, is between the details that the Bill presents that allow for exceptional circumstances when the Government might have to change the counterparty and the original proposal that was for a multiparty proposal, as Labour Members know. I do not think that they are claiming for a moment that it is a covert method of smuggling back in a multiparty arrangement. The Government are clear that we have moved from that view to the view that now prevails and is part of the Bill. I must say that, when the Government make their intentions clear and ask parliamentary draftsmen to frame them in law, they do so with clarity of purpose and certainty of intent. I could not have been clearer than I have been about both of those matters.

Robert Smith: Where the Bill does tackle the key worry of the industry about the multiparty concept is that an individual contract for difference would be with the multiple counterparties and therefore difficult to pursue in the event of default. Having a single counterparty was crucial to its creditworthiness within the contract for difference regime. The Bill now delivers the end to a multiparty end to the contract.

John Hayes: I could not have put that better myself. To put on one side for a moment the specifics of the debate that we have had, the other issue that was raised by the amendments and which deserves some attention is the worry that there might be a risk to the supplier obligation and CFD payments. There will be no risk, even in the exceptional circumstances that I have described. The ability to have an overlap is specifically to remove that risk. The provisions of the Bill are designed to build in greater certainty in a way that, had we not framed it as we have, people might have been worried. It is to avoid the investment hiatus that might result from having less flexibility.
Amendment 34 would increase the period of notice given to the Secretary of State to 90 days if the counterparty should wish to cease to be a counterparty. I appreciate the intention behind the amendment, rather than its spirit. It is designed to take out uncertainty, and the period of notice is a matter of proper consideration and fine balance. While a longer notice period would seem to be helpful, it would also mean that, for 90 days, a new contract would have to be issued to an unwilling counterparty or not issued at all. There were some doubts about that, so I believe that a shorter period that avoids any investment hiatus is preferable. Designating a new counterparty and transferring the essentials to ensure that payment can flow on existing CFDs can be achieved simply within 28 days, which is the period proposed under the Bill.
In addition, it should be remembered that the Secretary of State will have a relationship with the counterparty, including possible representation on the board, such that the notice should not be a surprise. In the unlikely event that 28 days did not prove long enough, under subsection (10) regulations can make provision enabling a counterparty, which has withdrawn its consent, to continue to have access to the supplier obligation for a period to enable payments to continue to be made. The amendment is unnecessary, given that further assurance.
Amendment 35 is designed to ensure that the maximum period for which there can be no counterparty is specified under regulations. That again in my judgment is unnecessary as clause 3(7) already places the Secretary of State under a duty to ensure that, so far as is reasonably practicable, there is always a designated counterparty in place. Amendment 36 would limit the Secretary of State to making only one transfer scheme in the event that rights, property or liabilities were to be transferred to a new counterparty, which seems counter-productive. In the event that a new counterparty must take over, the continuity of payments and investments happening quickly is imperative. The amendment would mean having to wait to design a transfer scheme that wraps up every single consideration, rather than being able to transfer the essentials quickly to allow business to continue.

Robert Buckland: My hon. Friend’s clear words on the Government’s intention should put at rest the mind of any court examining this matter that is asked to investigate Hansard in accordance with the principles of Pepper v. Hart. Is not the problem with the Opposition amendments that they simply do not get to the heart of the problem they identify and that a simple amendment to clause 3(5) to link it to subsections (6) to (10) would do the job more effectively than any of the amendments the Opposition propose?

John Hayes: My hon. Friend’s diligence is exceeded only by his charm. With those arguments, my measured explanation and my absolute assurance on the Government’s position, the salience of which my hon. Friend has emphasised, I hope the hon. Member for Rutherglen and Hamilton West will see fit to withdraw his amendment.

Tom Greatrex: I thank the Minister and the hon. Member for South Swindon for seeking to clarify the matter. Opposition Members have never questioned the intent that the Government made clear in their response to the pre-legislative scrutiny. Our concern is that, as we heard last week, the Bill might leave something open that could cause a degree of concern to those companies.
The Minister might like to reconsider his explanation, because, given the point raised by the hon. Member for South Swindon, if there is a better or more salient way to provide the absolute certainty that the amendments seek, alongside his statement of the Government’s intent, that can only be good for the Government, investors and the Bill. If the Minister is able to commit to going back to reconsider his colleague’s point, that would give a degree of comfort to members of the Committee.

John Hayes: I am always happy to consider points raised in Committee. It ill befits any Minister not to do that, so of course I will speak again to my officials, although I am confident about my argument.
 Dr Whitehead  rose—

Hugh Bayley: Tom Greatrex is on his feet, but he may take an intervention if he so chooses.

Tom Greatrex: My hon. Friend the Member for Southampton, Test may intervene.

Alan Whitehead: Does my hon. Friend agree that relating clause 3(5) to subsections (6) to (10) would be a good idea? Does he also agree that adding a plural to the first line of clause 2(2) for clarification would also be a good idea? Does he agree that the Minister should reconsider both of those amendments, which would be a great step forwards?

Hugh Bayley: Just to clarify, Tom Greatrex is in the middle of a speech responding to the debate on his amendment. He should resume his speech.

Tom Greatrex: I am grateful for your guidance, Mr Bayley.
I agree with my hon. Friend the Member for Southampton, Test that reconsidering those amendments would be a step forward. I was drawing towards, but had not quite reached, my conclusion, and I hope the Minister is able to consider those points so that he might give comfort so that the intention behind the legislation is absolutely clear and there is no opportunity for anyone to gainsay it. That will help to deliver what we want to see happening, which is the degree of certainty and clarity that will enable the investment to happen at the lowest possible price.
I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question put forthwith (Standing Orders Nos. 68 and 89), That the clause stand part of the Bill.

Question agreed to.

Clause 3 accordingly ordered to stand part of the Bill.

Schedule 1 agreed to.

Clause 4  - Duties of a CFD counterparty

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: I do not intend to detain the Committee long, because generally we support the clause. There was, however, a specific point to which I want the Minister to respond. It could only be my reading of the Bill, but he might be able to provide clarity and therefore reassurance.
The clause states that the counterparty must act in accordance with
“any direction given by the Secretary of State”.
Can the Minister explain how that does not contradict clause 15, which states that the Secretary of State is not a shadow director of the counterparty? I understand the purpose of clause 4, to prevent the Secretary of State being sued because of the absence of the counterparty, but I am struggling to understand quite how the counterparty must, on the one hand, do everything asked of it by the Secretary of State but, on the other hand, the suggestion that the Secretary of State is in control of the counterparty is rejected in clause 15.
Can the Minister provide the Committee with some clarity on that specific point? Otherwise, I have no other concerns about the clause.

John Hayes: The counterparty to a CFD will need to be bound by particular duties in discharging its responsibilities under the contracts. As the shadow Minister mentioned in passing, the clause establishes the duties to give legal effect to the provisions contained elsewhere in the Bill. The power for the national system operator to direct the counterparty refers only to the national system operator’s ability under clause 6 to direct the counterparty to offer a contract to a qualifying generator. As such, the clause is crucial to bring the certainty that, once assessed as eligible, a contract will be offered to the CFD counterparty.
The clause also allows for the Secretary of State to make such a direction. That is intended to be in relation to important projects for which the generic contracts may not be suited, such as carbon capture and storage demonstration projects, and enables the Secretary of State to negotiate contracts under particular circumstances. The sorts of provisions that may be set out in secondary legislation include a framework for the governance of the counterparty so that Government can establish any necessary controls on the ways the counterparty exercises discretion or makes decisions under the contract in a transparent manner. The clause establishes a duty on the counterparty to comply with such regulations.
The clause provides the foundation for the Government to apply appropriate controls for the counterparty to which the counterparty will be bound, and establishes the obligation on the counterparty by which it will work together with the national system operator in the delivery of investment in low-carbon generation.
In answer to the question asked by the hon. Member for Rutherglen and Hamilton West, the reference is to a legislative direction or regulation, which is distinct from the day-to-day management expected of a company director. The two parts of the Bill that he cited refer to a different interface between the Secretary of State and the effects of the clause. The question is fair, however. I do not think that there is any contradiction or need for further amendment, but I will look at it again—in the same way, I will look at the previous point the hon. Gentleman made—and, if necessary, I will bring further material to the Committee, or write to the Committee. I do not think it will be necessary, but I will look at the matter again as a result of his question.

Barry Gardiner: Let me link what my hon. Friend said about section 15 and not being regarded as directors of the company. I am not very good at quotations—unlike the Minister, who remembers them so well—but I am sure that it was Lord Beaverbrook who said something about power without responsibility. Precisely what we have here in this conflict—

John Hayes: For the record, I think that he related it to a harlot. Given the hon. Gentleman’s high moral standing, I am not surprised that he has forgotten that.
 Barry Gardiner  rose—

Robert Buckland: It was said by Stanley Baldwin, but the words were written by Rudyard Kipling. “Power without responsibility—the prerogative of the harlot through the ages.”

Hugh Bayley: Now that that has been clarified, Barry Gardiner may continue his speech.

Barry Gardiner: I do not mean to drag down the tone of the Committee. I did not want to refer to the Secretary of State directly in the way in which his two colleagues just have. I tried to dance around it, but there we are. The point is simply this. Given that the Secretary of State could, in certain circumstances, instruct the counterparty not to pay a supplier, while the Secretary of State is exempted from any responsibility under clause 15, there is no redress whatever for a supplier in that situation, which tends to undermine all that has been said about certainty hitherto in the Committee.

John Hayes: Let me be clear about the role of the Secretary of State in the terms associated with the clause. The directions and power of the Secretary of State will provide flexibility for important projects to agree bespoke terms, reflecting their different needs for securing the necessary investment in those particular circumstances. There is no other reason why the counterparty body should receive a direction from the Secretary of State.
This is not about the CFD terms being changed, because a duty exists that the CFD terms receive appropriate funding. Given that there is a duty to ensure funding, this is not a power to change the terms of the CFD. Indeed, the duty of the counterparty body to comply with the directions of the Secretary of State gives legal effect to clause 11, through which the Government may provide contracts on the counterparty body in secondary legislation, as implied or mentioned by the hon. Member for Brent North.

Barry Gardiner: But that is to ignore clause 7(1), which says that “regulations”—not “must” but
“may make provision about the amounts which must be paid by a CFD counterparty to electricity suppliers.”
The Minister is right to say that these are semantics, but they are important ones. The difference between saying that regulations “may” make such a provision and “must” make such a provision is precisely the loophole that exists here.

John Hayes: Under part 1 of the Bill, which we have already considered, the Secretary of State and the national system operator are provided with designated powers and responsibilities. However, neither party would be held liable for claims arising from a CFD contract as a result of those responsibilities. The CFD counterparty will be a separate legal entity, as the hon. Gentleman knows, precisely because it will absorb that liability.

Barry Gardiner: With respect, the Minister has simply restated the problem: the counterparty is a separate legal entity and the reason why it was so important to have a single counterparty was precisely that the supplier knew who they were going to sue in the event that they did not get paid. We are in a situation now in which the Secretary of State can direct the counterparty not to pay, but the supplier then has no redress against the Secretary of State for so doing.

John Hayes: Well, in fact it places an obligation on the Secretary of State, when making regulations under clause 5, to include provisions, the purpose of which would be to enable payments under CFD contracts. The effect of that is that the supplier obligation cannot be removed without primary legislation, and the regulations must enable the full amounts accrued under the CFD to be paid. The only time when that would not be required is when funding for those obligations was available to the Secretary of State directly under the ability to provide financial assistance to the counterparty body in clause 123. This will be under writing and, although it is not part of our current consultation, we are prepared to listen to points made on this matter and, if necessary, consider the matter further.
However, it is important that the Secretary of State should not be liable, given the powers that the counterparty body will have. The hon. Gentleman knows—indeed, he has made the case himself—that the particularity of the separate legal status of the counterparty body is essential to ensuring that, through private law and the circumstances that are built around the counterparty body, protection is in place. The separation is a virtue, not a vice in these terms, and I am sure that he recognises that. Or am I missing his point?

Barry Gardiner: The Minister is absolutely right to refer us to clause 5, but, if one goes to clause 5(2)(c), we have the eventuality considered that the regulation may
“make provision for electricity suppliers to pay a CFD counterparty for the purpose of enabling the counterparty to cover losses in the case of insolvency or default of an electricity supplier.”
If it were the case that the Secretary of State instructed the counterparty not to pay, in a case of insolvency, its outstanding debts to the supplier, then the insolvency practitioners who were winding up that company would have absolutely no redress on behalf of the creditors. That is why exempting the Secretary of State from obligations here in respect of the instructions that he or she might give to the counterparty is really material. It is important that we are clear that the Minister and his officials have considered all the possible scenarios and all possible implications of what is in the Bill.

Hugh Bayley: Order. The Minister is being generous in giving way time and time again to a Member. We are discussing whether the clause should stand part of the Bill, and this clause itself requires the counterparty to act in accordance with any direction given by the Secretary of State. The hon. Member for Brent North raises an issue that does not appear in the clause, although he may well, ingenious as he is, find opportunities at a later stage to pursue this matter further. The Minister should reply to the point that the hon. Member for Brent North raised in his intervention, but then I think that we should move on and the Minister should conclude his comments on the stand part debate.

John Hayes: Mr Bayley, I bow to your greater wisdom. I feel guilty; I am a little indulgent with the hon. Gentleman—perhaps a little too indulgent.

Hugh Bayley: I am happy for there to be free and open debate.

John Hayes: No, I must, during the course of our deliberations over the coming weeks, months and years, be mindful of the effect of that indulgence.
Just for the avoidance of doubt, a key feature of CFDs is that they will be private law contracts between the counterparty and the generator, and there will be private law remedies. We are particular about that protection. As such, neither the Secretary of State nor the national system operator should be sued in place of the counterparty, as the hon. Gentleman said. We are sure that the sovereignty of that relationship is underpinned, but it is a private law arrangement. Indeed, in the consideration given to the character of the Bill, we received many overtures from the sector and others about the matter. I framed the Bill very much with that certainty in mind.

Question put and agreed to.

Clause 4accordingly ordered to stand part of the Bill.

Clause 5  - Supplier obligation

John Hayes: I beg to move amendment 22, in clause5,page4,line13,at end insert—
‘(3A) Regulations which make provision by virtue of subsection (1) for the payment of sums by electricity suppliers must impose on the CFD counterparty a duty in relation to the collection of such sums.’.

Hugh Bayley: With this it will be convenient to discuss Government amendments 23 to 26.

John Hayes: This group of amendments will require supplier obligation regulations to place the counterparty to CFDs or investment contracts under a duty in relation to the collection of sums from electricity suppliers for the purpose of making payments under CFDs. It is already the Government’s intention that regulations should do that, but we believe that it would be helpful to state that clearly in the Bill.
The amendments will give potential investors greater confidence that the counterparty will have the funds to make the payments that are owed under CFDs—in that sense, it is not irrelevant to the debate that we have just had—since regulations, when they are made, will need to impose on the counterparty a statutory obligation in relation to collecting payments from suppliers to meet its payment obligations under contracts.
The amendments will also bring the drafting of the provisions in schedule 3 in line with similar provisions in clause 5(1). The amendments will not change the substance of the provisions, which will still provide the Secretary of State with the power to make supplier obligation regulations when he is a counterparty to investment contracts, and place him under a duty to make such regulations when contracts are transferred to a CFD or investment contract counterparty.

Barry Gardiner: I want to refer to amendments 23 and 24. Amendment 24 will insert into paragraph 7 of schedule 3 proposed new sub-paragraph (1A), which reads:
“Regulations must make provision for electricity suppliers to pay an investment contract counterparty or a CFD counterparty for the purpose of enabling payments to be made under investment contracts.”
The use of “must” there seems to be at odds with the wording of sub-paragraph (1) as it will be amended by amendment 23, which will read:
“Regulations may make provision for electricity suppliers to pay the Secretary of State…for the purpose of enabling payments to be made under investment contracts.”
Am I mistaken in believing that there is a tension between those two sub-paragraphs?

John Hayes: It might be helpful to the hon. Gentleman and to the Committee to emphasise that these amendments are needed to provide greater clarity. The counterparty to the CFDs, obviously, or investment contracts, will have a duty with regard to collecting payments. This is really about giving greater confidence that the counterparty body would take action to collect the money it is owed. To put that into context, this will be of particular interest to early investors, who might be contemplating entering into investment contracts before secondary legislation has been made. The Committee is obviously aware that we are looking at these matters closely.
These are minor and entirely technical Government amendments to bring the drafting of schedule 3 into line with the equivalent provision in clause 5. There is nothing new here; it is purely a technical matter. The amendments do not change the substance of the provisions and they do not change the power of the Secretary of State to make regulations to raise funds from suppliers. The amendments do not change the requirement on the Secretary of State to make such regulation in respect of the CFD or investment contract counterparty when investment contracts have been transferred to such a body.
I think that the hon. Gentleman’s concerns can be entirely assuaged on the basis that the Secretary of State can fund payments under the investment contracts directly under paragraph 20 of schedule 3. Before secondary legislation is made, the Secretary of State may need to fund them for the early investors that I have described. He must do this when transferring contracts, and these amendments merely—I do not say that lightly—represent a technical change to enable the process. I think the hon. Gentleman can be satisfied that it is no more than that.

Alan Whitehead: Will the Minister clarify not what the regulation is likely to be in terms of what is in the Bill but what might be the content of such a regulation in terms of making sure that people cough up, not to put too fine a point on it? The phrase “making sure that people cough up” is generally interpreted to mean “get the law on to them”. Presumably, making people cough up has at present the sanction that if they owe that money, and they have entered into a contract effectively to supply that money, if they do not do so, they are in breach of their contract and the law can be applied to them, as it stands.
That is not entirely the same in terms of circumstances in which someone should provide the money but has not, because whether or not one can get some sanction applied to them, we all know that those sanctions take a long time in the law, and therefore there are circumstances, or could be circumstances, in which, as a result of the envisaged change, when someone has effectively walked away from their obligations, or is about to do so, it could take a very long time to get that money back. Unless the regulation introduced to get that money back is of a pretty wonderful kind—the kind I have not yet seen—it is unlikely to supersede the ability of the law to get that money back, albeit rather slowly. Does the Minister have in mind a super-regulation that will ensure that no one is sold short in terms of the money that they expected to get as a result of a CFD or investment contract? The lack of such regulation could render them uncertain in certain circumstances that they really are going to get the money. That is at the heart of certainty of contracts.

John Hayes: I am reluctant to stray into too much debate about regulations, which we will be able to discuss at the appropriate time, although I understand why the hon. Gentleman makes that point. He is right. I know that he said he does not want to go into it, but for clarity, the amendments put on the face of the Bill what is already the Government’s policy intention, which is in essence, as he describes it: to ensure that regulation would require counterparty bodies to take action in relation to collecting supplier obligation. He is right, too, that such payments would be enforceable as a debt and subject to due process accordingly. He knows, although I shall remind him, that that will be backed up by Ofgem’s regulatory powers, too.
Suppliers will be regulated to pay. The counterparties can enforce the debt and suppliers could lose their licence. For example, if they do not pay, which is entirely possible, they may also have to post collateral in advance to cover payments. Losses can be mutualised across other suppliers, should they arise, so a number of sanctions exist already.
We will have a debate about those regulations at the appropriate time, but given your anxiety to move ahead with appropriate, but careful speed, Mr Bayley, I am reluctant to get into a debate about regulations that have been not been tabled. With those assurances about the scope of what that might look like, the role Ofgem might play, and the kind of measures that might be put in place, I hope that I have emphasised in my brief remarks that it would be a debt, and that mechanisms would ensure that the debt was collected.

Barry Gardiner: When the Minister said that losses may be mutualised over other suppliers, it set alarm bells ringing, because that was not something that I had heard before. It strikes me that it may set alarm bells ringing outside the Committee, because what that appropriates to the Secretary of State is the right in the schedule to pass a regulation in the case that a supplier has failed to meet their obligations to pay the counterparty. That regulation would compel other suppliers in the marketplace to bear a share of those losses, and on what basis, there is no clarity. It seems, however, to recall the remarks earlier today about what scope there is in the Bill for the Secretary of State to be setting the terms of business. It is absolutely unacceptable that that sort of thing is, with respect to the Minister, slipped out in a note during the Committee process, without any prior warning, either to Parliament or to the suppliers that will be affected by it.

John Hayes: Just to inform the hon. Gentleman, who I know is assiduous in his study of such things, the mutualisation that I mentioned is described is detailed in clause 5(2)(c). This exists under the balancing and settlement code. Before I mentioned that, I said that the posting of collateral means that, in my judgment, the provision would be rarely needed, if ever.

Amendment 22 agreed to.

Amendment proposed: 40, in clause5,page4,line39,at end insert—
‘( ) Regulations must include provision for—
(a) the Secretary of State to report annually to Parliament on the impact on consumer bills of provisions under this section; and
(b) the issuing of notices exempting energy intensive industries from the provisions under this section.’.—(Tom Greatrex.)

Question put, That the amendment be made.

The Committee divided: Ayes 9, Noes 12.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Tom Greatrex: I want to take the opportunity to ask the Minister a couple of questions about clause 5 and the supplier obligation. Notwithstanding his previous comments about regulations, I seek further information on the supplier obligation and, in particular, the criteria for the amount to be paid, the regularity of payments and the mechanism for collection and distribution and the level of collateral the supplier will need to post to secure against any default.
Those are quite significant matters. I did listen to the Minister carefully in response to the Government amendment when he made the point, in his usual courteous way, that he is not here to debate the regulations, as we do not have them yet. However, these are significant matters and I would be grateful if he could provide some information to the Committee regarding when and where those issues are. The matter has been raised with me, and I am sure with other Members of the Committee, both from the perspective of industry and consumer organisations.
The Government have said that they are minded to apply any exemption for energy-intensive industries through the operation of the supplier obligation. I realise that some responsibility for the matter falls to the Department for Business, Innovation and Skills rather than the Minister’s own. Does he know whether, in regard to this, BIS Ministers have had any discussions with the Commission around state aid clearance? There is a concern that state aid clearance may not be afforded to this measure. If that happens, has the Department thought of any potential amendments to the Bill that may provide another route to secure the place of some of those industries?
I speak with a constituency interest in having part of the last remaining steelworks in Scotland and the only remaining brickworks in Scotland in my constituency, both of which are energy-intensive. Both in different ways have a part to play potentially in some of the supply chain for the investment we spoke about in earlier debates. I will be grateful if the Minister can respond to those points in relation to clause 5.

John Hayes: We have talked a bit about the supplier obligation, which is the essence of this part of the Bill. It is the means by which the payments owed to generators under contracts for difference are funded from suppliers in Great Britain and Northern Ireland; as such, it is an essential part of the Bill. That is reflected in the fact that the clause says that the Secretary of State must make the supplier obligation regulations for the purpose of enabling the counterparty to make payments. We have had an extensive debate about some of the detail of that during our discussion on the amendments.
We agree that a formal supplier obligation is important. The shadow Minister will know that our call for evidence on that has just closed. He raised the issue of the timetable; I will go back and have a look at that, because it is important that we respond to that call with appropriate speed and diligence.
The shadow Minister also raised the issue of energy-intensive industry; we are in discussion about the detail of that, as he knows. In addition, he is right in saying that we are in discussion with Ministers in the Department for Business, Innovation and Skills, as they have direct interest in those matters too. It is important that we get the balance right here. There are a number of energy-intensive industries that are important employers and form an important part of our economic infrastructure. He mentioned the steel industry and the chemical industry are examples, and there are a whole range of others.
We want to move ahead in a way that is measured, responsible and sensitive. To get that right, we need to ensure that these measures take account of the representations that are made by those industries, and the effects that change might have on their costs and therefore on their profitability. Some of the areas in which they operate are highly competitive internationally, as the shadow Minister and others will know, and we are mindful of that as well. I had some dealings on this issue when I was a Minister at the Department for Business, Innovation and Skills. It was not my principal responsibility, which, as he knows, was further education and skills, and adult learning; nevertheless, as a Minister in that Department I had cause to be involved with the steel industry, for example, at one point, in some detail, and so I am sensitive to some of the matters that he has raised. I will look again at the timing as a direct result of his comments this afternoon.
The clause ensures that generators can be confident that the counterparty will meet its obligations, because it guarantees those payments. We talked about that issue in the exchange I had with the hon. Member for Brent North during the short debate on the amendments. Before we finalise our detailed design, we are anxious that the implications of the supplier obligation for supply companies under the regulations do not produce unintended consequences. That is why we have also called for evidence from suppliers. The shadow Minister will know that that call has also recently closed.
I am also aware that the Chairman of the Select Committee expressed concerns, during its scrutiny, about guaranteeing the payments, as indeed did the Select Committee as a whole. It is an understandable concern. We have tried to put in place arrangements that ensure confidence and produce certainty while minimising the need for further Government guarantees.
The supplier obligation will be collected by the CFD counterparty, as I have already made clear. Regulations made under the clause will enable the counterparty to pursue debts against suppliers, as I described in some detail, through what I described as due process—by that, of course, I meant the courts—if necessary.
On top of that, the comfort of a strong penalty regime will be provided by Ofgem—I have mentioned Ofgem’s regulatory role in this respect—and the breach of the requirements of supplier obligation will be enforceable as if the obligation were a condition of a supplier’s licence, as I again mentioned earlier. Suppliers who can pay, will therefore pay. But if they cannot, we envision further measures to ensure the stability of revenue for generators. Regulations made under this clause will enable the CFD counterparty to require suppliers to post collateral in advance to cover an upcoming payment. As part of the detailed design, a balance will be struck between the cost of posting collateral to suppliers and the required stability of the regime.
I mentioned mutualisation, meaning the spreading of any outstanding payments after collateral is used across remaining suppliers, but that will be used rarely, given the provisions on collateral. Some concerns have been raised about what would happen if a large supplier defaulted, creating a loss that was too big to mutualise. There would be unsecured losses only if a supplier managed to incur losses greater than the amount of collateral posted, and under clause 5(2)(c) actions to mutualise losses can begin at the point of default of posting collateral. In addition, the existing supplier of last resort regime enables customers to be moved from a failing supplier to an alternative. Payments will continue under a new supplier, and the energy company administration scheme has been designed to deal with large supplier default.
Clause 8 deals with the unlikely event of temporary shortfalls in the amount the counterparty receives from suppliers, and will provide it with the ability temporarily to make pro-rata payments to generators. It will then be under a duty to recover shortfalls and return the amounts to generators. The clause will enable the Government to set out in transparent regulations the basis on which the supplier obligation will be calculated and administered. The CFD counterparty must also have the ability to recover its costs. We are considering options for those costs to be met by electricity suppliers. The clause allows for suppliers to make payments to cover the costs of the CFD counterparty company.
I emphasised at the outset that this is an important part of the Bill because the guarantee of payments is the fuel that drives the system. I am confident that the measures we have put in place will enable the system to be so fuelled.

Question put and agreed to.

Clause 5, as amended, accordingly ordered to stand part of the Bill.

Clause 6  - Direction to offer to contract

Tom Greatrex: I beg to move amendment 42, in clause6,page5,line4,at end insert—
‘( ) Regulations must—
(a) place a duty on the Secretary of State and the Authority to promote new generation capacity from community energy schemes; and
(b) define community energy schemes.’.

Hugh Bayley: With this it will be convenient to discuss amendment 43, in clause6,page5,line4,at end insert—
‘( ) Section 41(4)(a) Energy Act 2008 (“specified maximum capacity”) is amended as follows—
“Specified maximum capacity” means the capacity specified by the Secretary of State by order, which must not exceed 10 megawatts.’.

Tom Greatrex: I am pleased to have the opportunity to speak to these amendments tabled by me and my hon. Friend the Member for Liverpool, Wavertree on community energy schemes. The Minister will know that we touched on that during the evidence session, and particularly with the Secretary of State who, with some assistance from his ministerial colleague, made clear the imminence of the community energy strategy, which I think will be in March. I tabled the amendments to raise some issues relating to community energy on which I want to stimulate discussion and to obtain clarity about the Government’s intention, notwithstanding that soon-to-be-published strategy.
Community energy schemes have a number of benefits, particularly given that the Government have stated several times their intention to bring diversity, resilience and security to the energy market. Community energy schemes can play a significant part in that. They can also make a sound economic contribution through attracting investment from new sources and, importantly, through locally owned strategies for generating and saving energy, help to address some of the issues of fuel poverty and greater engagement among communities in generation and conservation of energy. I am sure that members of the Committee are aware of a number of examples in their constituencies that demonstrate that on a relatively small scale. They can also promote wider carbon reduction in terms of recycling revenues into local energy efficiency schemes. Again, there are a number of examples.
The Minister is aware that Co-operatives UK has estimated that there is a huge potential for community and co-operatively owned energy in the UK. I think they estimated nearly 3.5 GW, broken down into 2 GW in England, 1 GW in Scotland and about 0.5 GW in Wales. These are significant amounts which it equates to three or four conventional power stations.
However, as this Bill stands, there is little in relation to community energy. It is one of the areas that would benefit from some amendments and that is the point of these amendments today. As I reminded the Secretary of State when he gave evidence at the start of this Committee process, he has previously said that he wants a community energy revolution. While I am not always a revolutionary, I agree that the potential for a significant increase in community energy is an opportunity that should be encouraged by Government and can be done in part through this Bill.
For many involved in community energy, the real concern is their ability to participate in CFDs. We heard this from Nigel Cornwall, the consultant from Cornwall Energy Associates, who gave evidence. Members will recall that he was on the same panel as a couple of academics and he was not always able to make as full a contribution as others during that session. Therefore he made his points concisely and promised to provide further written evidence to Committee members. He made the point that the high degree of technical knowledge that it is anticipated will be required to participate in CFDs may well act as a barrier to smaller generators and that they also receive lower market prices for their power. This is not compensated through the proposed CFD, as envisaged in the Bill.
So with the end of the RO, suppliers will have no incentive to purchase renewable energy from independent generators. Those were the views expressed by Cornwall Energy. In response to a question from my hon. Friend the Member for Liverpool, Wavertree, Mr Cornwall called this,
“a black hole in the Bill with regard to market access, particularly its impact on smaller players, generators and suppliers”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 79.]
Therefore, our amendment 42 is designed to increase the feed-in tariff threshold from 5 MW to 10 MW, to help to address this issue. I put these points to the Secretary of State when he was giving evidence at the start of this process. He indicated that either this was not an issue or there were much more significant issues than this threshold; and that it does not really affect community energy schemes because these are under 5 MW. This is not necessarily the case and I am sure that the Minister and his colleague would like to be aware—if they are not already—of at least two examples above 5 MW: the Westmill wind farm in Oxfordshire, which is 6.5 MW and is a community-owned scheme, and the Lochcarnan wind farm in South Uist in the Western Isles, a 7 MW scheme, where the income is invested in the local community.
Those projects show that, under the existing renewables obligation scheme, community ownership at a significant scale is achievable. Members of the Committee will be aware that that can be done if the projects have access to markets and finance. In Denmark and Germany, co-operative ownership of renewables is much more widespread, as it is in the US. However, in the UK, co-operatives and community schemes and independent commercial developers find it harder to access finance than schemes backed by large utilities. That makes development costs higher, returns lower and puts communities and other small developers at a significant disadvantage.
It is anticipated that the complexity of the CFD proposals, with the lack of the demand pull-through that was provided by the renewables obligation, will further worsen the situation for co-operatives and community schemes, compared with larger, commercial schemes. The Government continue to assume that community means small-scale, despite the evidence that I have cited. However, if Ministers do not consider the interests of communities, I am afraid that their assumption is likely to become a self-fulfilling prophecy.
We suggest increasing the threshold from 5 MW to 10 MW, in line with the Energy and Climate Change Committee’s discussions on this issue, with which many Committee members will be familiar. At a later stage, others may seek to increase the threshold further and bring in other aspects. However, we see merit in being consistent with the Select Committee’s view. We challenge the assumption that community energy is necessarily small scale. A number of organisations believe that, with a higher FIT, the scope could be increased.
I have heard the Minister say on a number of occasions that he wishes to see more diversity in our energy supply market. We do not disagree, and that is the purpose of these amendments. Amendments 42 and 43 would require the statutory authority and the Government to support community energy and to give a definition of community energy. I am sure that the Government will consider doing that with their strategy. However, for the strategy to be effective, there is a sound argument that increasing the scope from 5 MW to 10 MW will ensure that what I anticipate will be in the strategy is achievable.

Hugh Bayley: Does any Back Bencher wish to speak? Apparently not. I call one of the Ministers.
 Mr Hayes  rose—

Gregory Barker: It is me. We are joined at the hip; neither of us can stand up without the other moving. This is the first time that I have risen. It is a pleasure to be properly in harness in the Committee and to serve under your chairmanship, Mr Bayley. I am glad to have the chance to speak on community energy, the feed-in tariff scheme and the benefits of encouraging a more distributed energy economy.
I find myself in a great deal of agreement with the hon. Member for Rutherglen and Hamilton West. He spoke of the benefits of bringing diversity, security and resilience from greater community and distributed energy, and I wholeheartedly agree. There are also very sound economic reasons for this measure, as well as the engagement that it brings, as he said. Often, communities are brought in to the energy sector because they want to generate energy from one technology, but once they have found a route in, they discover that there are many other opportunities to engage, whether on energy efficiency or with other technologies. That is extremely welcome, and I have seen very real examples.
That is why the coalition has made community energy such a high priority. In the Department of Energy and Climate Change, we have given real resource to this issue and made it a policy priority in a way that it has never been before. The fact is that communities can ignite a passion for energy issues and can act as a focus for different strands of the sector to come together.
As a result of the changes that we have made, DECC now ensures that communities have a voice right across our portfolio. In fact, DECC has commissioned the Centre for Sustainable Energy to produce an interactive green deal pack specifically for community organisations on how, for example, communities can engage with the green deal.
DECC is taking work forward with Ofgem to encourage a more diverse energy market and the plurality that we all seek, and is taking backstop powers on liquidity and so on to boost transparency in competition should actions not prove adequate. Smaller independent renewables companies should benefit from improved competition in the power purchase agreement market once CFDs are available. We are working with the market to smooth the transition to the CFD regime. However, reflecting the importance of independent generators, we are taking powers in the Bill to enable the Government to intervene in the event that the PPA market does not develop as expected. We also have a number of trial projects on community energy systems, using Ofgem’s low-carbon network funds.
In July 2012, we explained how we would support community energy generation within the FIT scheme, and we have already defined community energy installations in the FITs order. FITs community energy projects, such as wind farms or hydropower, now benefit from tariff guarantees, which allow communities, particularly when they are endeavouring to put together a larger project, to have certainty about the tariff that they will receive once their installation is up and running. I have to say that the tariff guarantee was a welcome addition to the FITs regime that came in as part of our reforms of the system.
For PV community projects, we have introduced an exemption from the energy efficiency requirements for schools, further education colleges and non-domestic buildings, to ensure that such community buildings can benefit from the installation of solar PV at the heart of their communities. We are very aware that these community buildings can often have a powerful, iconic impact on spreading the engagement message around the energy sector.
We have actively supported community energy projects with real money taken out of the DECC budget. For example, last year, we allocated £10 million to the successful local energy action framework programme that was disbursed among several hundred local groups, helping them to get off the ground with their plans to develop a local energy project. That was much-needed seed capital. When I met those groups at a networking event that we held in London, I was struck by the extraordinary enthusiasm and success that they have had in starting with one project but then snowballing into a range of others. I do not underestimate the power of community engagement.

Luciana Berger: I thank the Minister for kindly giving way. He made a very articulate point that I heard for myself when last week I visited a project in Brixton called Repowering South London. I heard from the people there that they are looking to grow the scheme. Does he acknowledge the fact that, although many projects are currently under the 5 MW barrier and only some of them are at or above it, many of them could go above that level?

Gregory Barker: Indeed, and I will come on to that point, but we would have to go some way to find a community project in Brixton that went beyond 5 MW. We have to bear in mind the scale of 5 MW projects, but we will come on to that.
Another example of DECC putting its money where its mouth is and investing in community energy schemes is the £5 million that we have given to Cheaper Energy Together—a special scheme to help communities to finance innovative collective switching and purchasing schemes.
To summarise, the coalition Government have been active as no Government have before in not only inspiring but driving and investing in community energy. We are absolutely committed, not just in our words but in our deeds, to the community element of the whole energy agenda.
With the help of the community energy contact group, which I established very soon after coming into the Department, we will launch our community energy strategy shortly. A great deal of work has gone into that strategy, not only within the Department but more broadly. Work has been undertaken by community energy groups themselves and we have had fantastic engagement, largely from voluntary sector personnel—people who have given up their own time to participate in this project. They have given their expertise and shared their experience, which really will help others looking to replicate that expertise and experience. When we publish that community energy strategy in the spring, it will set out our future ambition for community energy.
The publication of the community energy strategy will be the appropriate opportunity to land and secure the Government’s ambition for community energy. Rather than being a footnote to the Bill, it needs to stand alone. We do not think it is necessary for there to be another piece of legislation, but the strategy needs rigorous policy and a clear statement of intent. That is what we will publish, and what we expect to be held to account for in our delivery.
Although no Government have been more proactive in their support or enthusiasm for community energy than we have, we do not consider—on balance and on reflection—that amendment 42 is necessary. I hope that, having quite rightly raised this issue during consideration of our energy economy, the hon. Gentleman will consider withdrawing the amendment.
Regarding amendment 43 and the point that the hon. Member for Liverpool, Wavertree made about the feed-in tariff scheme, it is a matter of public record that I myself supported the expansion of the FITs scheme at the Conservative party conference last year. I think there was significant merit in my doing so. However, this is a coalition Government and this is also an issue that cannot be rushed into, because there would be significant consequences to doing that and they need to be thought through carefully.
Nevertheless, the fact that the hon. Gentleman has tabled this amendment, which seeks to raise a threshold, should be seen as a significant vote of confidence in the reforms that we have made to the FITs system, because as a result of our reforms we have now created a far more transparent, agile and reliable support system for smaller-scale renewables, which marries the best learning from Germany with the insights from our own local home-grown renewables sector. I am very pleased with the way that we have been able to work with the renewables industry to complete these reforms, which were not easy and required difficult decisions to be made.
I have to say that the future looks increasingly positive for small-scale low-carbon generation, and I am very proud of the way in which we now have a mature debate about the future of this sector. Without appearing to single out one technology, I was particularly pleased last week to launch the national solar centre. The solar industry, which has been through a challenging time as a result of the need to reform the FITs system, now looks set to enjoy a period of strong, sustainable growth in the UK.
We have just completed the last batch of changes to the FITs scheme and we want to continue to use the productive relationship that we have fostered with the sector to ensure that we maintain the optimum support mechanism for smaller-scale renewable power as we introduce the reforms set out in this Bill.
As we enter a new stage for the electricity market, we need to make the most of the established systems that support a great many renewable generators. At the same time, we appreciate that support for low-carbon generation is changing and we need to ensure that we can continue to provide the optimum framework to guarantee that growth. We need to see out to 2020 and beyond.
We should also remember that the renewables obligation will continue to be available alongside the CFD to support new generation from renewables greater than 5 MW right up until 2017. Alongside the introduction of CFDs, we need to bear in mind that increasing the FITs threshold beyond 5 MW would move the small-scale FITs scheme into a different market, covering installations of considerable scale and complexity. That is not necessarily a bad thing and potentially could be very good, but we need to do it—were we to do it—with our eyes open to the wider potential impacts on consumer bills, the tariff scheme and the levy control framework. A 5 MW solar PV installation, for example, is roughly the size of five football pitches and would, at current prices, generate subsidies of hundreds of thousands of pounds a year. Obviously, as with any subsidy taken from across the energy sector, that is taken only from consumer bills. We need to be careful in looking at the proposal, so that we consider the possibility of any change thoughtfully and deliver value for money.
Few community electricity schemes exist or would be realistic in the multi-megawatt range, although the hon. Member for Rutherglen and Hamilton West mentioned at least two and we would like to see more than that. We need to ensure that we support what communities can actually deliver and what they want to see from their homes and schools. Without a sense of ownership, the benefits of community energy will all too easily slip away. That is why we are working in partnership with the community energy sector to develop the strategy that I have been discussing and to ensure that we address such questions in an evidence-based and thoughtful way.

Luciana Berger: I wonder whether the Minister will specifically respond to the point about co-operatives and what work his Department is doing with Co-operatives UK. Co-operatives incur a specific cost from providing that community energy by way of their legally obligated social responsibility. Many examples exist of different co-operative energy projects across the country where a certain proportion of the money generated goes back into such things as energy efficiency projects, which meets other Government aims. Therefore, as the Minister previously discussed the wider aims of his Government—co-operatives being one that we hear the Government mention quite a lot—will he specifically respond to that point?

Gregory Barker: We do not currently have a specific co-operative tariff. We have taken powers to differentiate for communities, but we do not have a specific tariff for communities within the feed-in-tariff scheme. However, we are keen to encourage co-operatives and our community strategy group has been looking at that. When we publish our community strategy, I fully expect there to be recommendations as to how we can more broadly support co-operatives. I have certainly seen the good work that they do and want to encourage them more.
We should not forget that the FITs scheme is about more than just community projects. FITs have allowed us to support innovation and engagement by commercial organisations, by individual landowners and developers and, in particular, by small and medium-sized companies, which are absolutely crucial to our growth agenda. It must be right that as wide a group of organisations as possible are able to take advantage of our distributed energy ambitions.
We need, however, to proceed with care, so that any changes to schemes, were changes to come forward, incentivise the right kind of projects. Our forthcoming changes to the renewables obligation, for example, will help to secure a viable future for larger-scale solar power, which has a particular emphasis on the best use of rooftop solar and brownfield. We need to be careful that we do not over-incentivise large-scale ground-mounted projects in inappropriate places—I am thinking of greenfield agricultural land—that could generate strong opposition to our community energy agenda. As I said, a 5 MW solar plant, for example, would be several times the size of a football pitch, so we need to bear in mind that when we start talking beyond small scale, we are actually talking about potentially very large energy projects. All future changes would need to be consistent with that approach. It needs careful design and thoughtful consideration. It certainly could not be a scheme about renewable energy at any cost. Impacts on the local community, on landscape and on consumer build have to be a real consideration of any expansion of the scheme.
In conclusion, we appreciate the amendment, or at least the intent behind it. The issue has a great deal of support within the Government. However, it requires further consideration. We know that the previous feed-in tariff scheme was introduced without sufficient rigour and thought given to the unintended consequences that could lie behind it. It actually gave rise to perverse consequences and we had to make substantial reforms as a result. Is there potentially an ambition to grow the scheme forward? Are we open-minded about that? Absolutely, but we need to give the matter further consideration. As I said, we need the Secretary of State to be comfortable with that consideration.
I recommend that the hon. Gentleman withdraws his amendment—I will be happy to talk to him outside the Committee—as the matter is under active consideration in Government.

Peter Aldous: I do not wish to make a speech; I simply want to put something on the record. As set out in the Register of Members’ Financial Interests, I am a partner in a family farm and that partnership has just entered into an agreement for the letting of some land for a solar farm. I want to put that on the record to avoid any misunderstanding.

Hugh Bayley: Thank you for that advice.

Tom Greatrex: I think this is the first time that I have heard a Conservative Minister place responsibility on the other members of the coalition party. I am looking at the faces of the two hon. Members. One is more inscrutable than the other, but I take it from their facial expressions that it was a surprise to be held responsible for the position that the Minister outlined. There was little to disagree with in his first remarks. In fact, he was broadly agreeing with some of the points that I had made, and I salute his enthusiasm for community and co-operative and mutual energy.
I understand the Minister’s point about his strategy, which will soon be published. A part of the effectiveness of that strategy was in seeking to grow community energy. My hon. Friend the Member for Liverpool, Wavertree referred to at least one example, and I know there are others. Schemes would be looking to expand and to continue to expand. The strategy would be fine and well, unless the state of the law at some point makes it difficult for them to expand because the 5 MW limit applies. It could almost be perverse and there could be unintended consequences. The strategy could be saying all the right things and making encouraging noises. Given the Minister’s own personal interest and involvement, he will go to lots of forums and make enthusiastic comments, as I know he is adept at doing, in support of community energy, yet the expansion of those schemes will be hampered by one aspect of the Bill that we did not take the opportunity to amend when that opportunity arose in Committee.
I take the point that the Minister makes about duty and the definition in relation to amendment 42. Given the undertaking, which I took from his earlier contribution, that those issues will be addressed within the strategies and the points around the encouragement of community energy, I will withdraw the amendment. I expect that others will wish to bring some of these issues up again, or some related aspects, on Report. I would like to press amendment 43.

Gregory Barker: In respect of amendment 43, what I was trying to indicate to the hon. Gentleman is that this is under active consideration in the Government. If it were pressed to a vote at the moment we would not be able to support it, but I hope that it might be something that we can revisit. We are on the first day of the Committee proceedings in the Commons. It will come back on Report. It has to go to the Lords. We may be able to return to it. So rather than bring this to a head now I ask him to consider staying his hand, pending further consideration by the Government.

Tom Greatrex: I wonder whether the Minister could perhaps give a little bit more on that point. Is he hinting that there may be a Government amendment on this, not necessarily the same amendment but with the same purpose on Report, or subsequently? Or was he indicating that this is something that he would rather not vote on now?

Gregory Barker: No; it is above my pay grade to make the commitment that we will definitely return with an amendment. We have to go through a proper consideration. But we may be returning and leaving the door open to returning with a Government amendment on Report or in the Lords.

Tom Greatrex: I am grateful to the Minister for that little bit more. I will take him at his word and hope that he wins that battle with his Liberal Democrat colleagues in the coalition to seek to promote community energy further. I am sure that at least one of his Liberal Democrat colleagues will make that point to the Secretary of State. I am sure that he will be a strong supporter of community and co-operative energy. I am sure the other Member is too, but he is much better at not giving anything away. If a Government amendment does not appear on Report he may find amendments from others addressing the issue. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Tom Greatrex: I beg to move amendment 44, in clause6,page5,line24,at end insert—
‘( ) Regulations must make provision for the setting of a strike price for a contract for difference.’.

Hugh Bayley: With this it will be convenient to discuss the following:
Amendment 45, in clause6,page5,line24,at end insert—
‘( ) Provision included in the CFD Regulations must in particular include—
(a) provision for setting the strike price by or under the CFD Regulations (“administrative setting”);
(b) provision setting the strike price by determination on a competitive basis (“competitive setting”);
(c) provision for a combination of administrative and competitive setting, including providing for the lower of two strike prices set by administrative setting and competitive setting; and
(d) a report to Parliament by the Secretary of State within three days of any provision by virtue of paragraphs (a) to (c) being made.’.
Amendment 46, in clause6,page5,line24,at end insert—
‘( ) Regulations must make provision for the setting of a market reference price for a contract for difference.’.
Amendment 47, in clause6,page5,line24,at end insert—
‘( ) The market reference price for a CFD is the price of electricity per megawatt hour that may be specified in, or determined under, the CFD as the market reference price for electricity generated in the period to which the CFD applies.’.
Amendment 48, in clause6,page5,line24,at end insert—
‘( ) The provision included in the CFD regulations must in particular include provision for—
(a) setting the market reference price by or under the CFD Regulations; and
(b) the Secretary of State to report to Parliament on any provision made by virtue of paragraph (a) within three sitting days of any provision being made.’.

Tom Greatrex: I believe this is probably back in the purview of the other Minister. Having enjoyed a brief interaction with his colleague we go back to some of the detail in relation to the EMR and CFDs. The amendments seek detail on the process for setting strike and reference prices, which the Minister and others in debate earlier indicated they see as particularly significant. The Minister will be aware that we are in a slightly curious position here. The draft Bill published in May contained clauses on those two important issues, but those clauses do not appear in this Bill.
One of the most significant aspects of CFDs for generators, suppliers and consumers is the strike price and its impact on how much people will pay for electricity in years to come. The Secretary of State himself said in evidence to the Committee that the strike price is what particularly concerns investors. He said:
“The big issue that they want to know is the strike price. That is rather important, as you can imagine, for the contracts for difference.”
I am making a habit of agreeing with the Secretary of State, but I believe that is the case. He went on to acknowledge that the strike prices will not be known until the end of the year at best. His exact words were that
“we hope to have a final strike price in December.”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 8, Q13.]
The inclusion of “hope” introduces yet more uncertainty and doubt.
Keith Anderson of ScottishPower said in his evidence that any delay in seeing the detail of the strike price would be concerning and would have an impact on investment. Speaking about draft strike prices, he said:
“If we do not see them until after the summer, we will start to get worried, because we will start to think that there will be a delay to the final strike prices.”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 21, Q55.]
Andrew Buglass of the Low Carbon Finance Group made it clear that any assessment of the levy control framework will be impossible until the detail of the strike prices have been revealed. He said:
“It is therefore hard for us to form a view at this point as to the adequacy of the £7.6 billion cap overall, particularly since we do not know at what level the strike price will be set.”––[Official Report, Energy Public Bill Committee, 15 January 2013; c. 54, Q160.]
He continued to emphasise the importance of the strike price when he said:
“If the strike prices that are proposed are not viewed as sufficient to bring forward the investment, they will take their investments elsewhere.”—[Official Report, Energy Public Bill Committee, 15 January 2013; c. 55, Q163.]
All the points raised during the evidence sessions show just how key strike and reference prices are to the success or otherwise of CFDs in attracting investment at the appropriate cost. It is for those reasons that I am concerned that there is so little detail of how the Government will arrive at the figures and of how the strike and reference prices will be set.
According to the Government, strike prices on renewables will be set in a similar way to the RO banding review, and their decision will be based on analysis by the system operator, which is National Grid. On CCS, prices will be set after negotiation between the Department and developers for early-stage projects, and on nuclear, they will be set after negotiation between the Department and developers on a project-by-project basis; indeed, that is the case in relation to Hinkley. However, I am not convinced that that is enough to go on. Investors need clarity on the process for setting the strike and reference prices for both administrative and competitive price-setting, and on how those processes will differ according to technology type and much more.
Specifically on amendment 48, which would oblige the Secretary of State to come before Parliament to announce strike prices within days of their being set, we must have transparency above all on the strike price reached, whether that is for new nuclear, offshore wind, CCS or any other low-carbon technology. Knowing that he will be held to account for any strike price should help to drive the Secretary of State to the best price for consumers.
Importantly, as we have said in relation to other aspects of the Bill, the maximum amount of transparency will increase the level of public confidence and therefore public support. We must all acknowledge that with significant shifts in policy, a number of people and sources may well seek to suggest a lack of transparency. Therefore the maximum level of transparency is important. I have tabled the amendments to enable the Government to respond to some of the significant questions about how the strike and reference prices will be set.

Michael Weir: I want to make a few brief points. I listened carefully to the hon. Member for Rutherglen and Hamilton West and agree with much of what he said.
One of the things that concerns me about the whole question of CFDs, particularly in regard to strike price, is how we will deal with newer technologies. It is easier to see how established technologies like wind and nuclear can establish a strike price, because there is a record to some extent of how they have performed. The strike prices we set for newer technologies will be important for CFDs, which will replace the renewables obligation. Wave and tidal technologies, for example, may need more support in the short term, because they have no prior record or commercial application. The existing system supported all manner of newer technologies through their initial stages, but it is not clear how contracts for difference will do that, because the prices will be determined by the market, although in the first instance they will be set administratively. The initial administrative price will give clear direction to the market as to how the Government expect those technologies to go, so it is important that those prices are right. The clause states:
“The Secretary of State or the national system operator may, in accordance with provision made by regulations, direct a CFD counterparty to offer to contract”.
Will the Minister expand on how he intends the system to work for new technologies that have not gone through the renewables obligation to any great extent and are not yet commercially viable?

John Hayes: I am grateful to Opposition Members for tabling the amendments, because they have given us another opportunity to discuss the CFDs and, in particular, the setting of the strike price, which, as the shadow Minister said, is critical to the success of our reforms. A number of hon. Members have an interest in the reference prices and strike prices and it is right that the Select Committee looks at those matters in detail. The industry, of course, is interested in the matter too, because it is the basis on which investment will be secured or otherwise.
The Government fully recognise the need for the market to understand what strike prices prevail. I draw the Committee’s attention to the fact that there is already sufficient power under subsections (4) and (5) to make provisions on the setting of strike prices for CFDs through administrative or competitive means, or a combination of the two.
Before I move to the principal thing I want to say about the amendments, I will specifically deal with the point raised by the hon. Member for Rutherglen and Hamilton West in his opening remarks. He said that originally much of the text of the amendments was in the draft Bill, and he is right. The reason was that the text formed part of the multiparty counterparty model and reflected the fact that the CFD was at that point formed of hybrid contract legislative instruments. Putting provision about that in the Bill was both appropriate and necessary at the time.
However, as we changed that—we discussed the metamorphosis earlier—to a single counterparty model with a supporting private law contract, we deemed it unnecessary to detail the text of the amendments in the Bill, because the Bill now envisioned the arrival of that genuine private law contract. The direction given by the delivery body or the Secretary of State will dictate the terms that must be offered by the counterparty and those terms include the strike price. That is the reason for the change, but the hon. Gentleman is right to raise the issue of how far one can go in establishing a degree of confidence in the determination of strike prices. He emphasised the need for transparency in that respect, and I agree.
Of course, to some degree, it will almost become easier as the new arrangements become established, such as those in respect of new technologies and nuclear. Once a set of assumptions has been formed based on the published details of the results of earlier negotiations, expectations will be formed, so in a sense, certainty will be a product of the system’s success. It is not easy at this juncture to be precise about the strike prices because they are the subject of negotiation, which I emphasise.
As the hon. Gentleman knows, the Government intend to set out in regulations the provision to set strike prices administratively. Similarly, it is intended that the provision for setting a strike price through competitive price discovery will be set out in regulations, too. Consequently, Members will have the power to scrutinise the detail of those provisions at the appropriate time as part of the secondary legislation process. Regulations on contract terms that may be offered are all subject to the affirmative procedure, so they will be subject to scrutiny.
During the passage of the Bill, we intend to make known the decisions we are taking on strike prices. The Government will set the CFD strike prices for renewables informed by evidence from the system operator. Broadly speaking, the strike prices will be in line with the renewables obligation banding review, as my fellow Minister suggested. The system operator, in its capacity as the delivery body, will undertake analysis, perhaps following research, that will include modelling the impact that potential CFD strike prices for renewable generation will have in reflecting the Government’s objectives for creating the energy mix, particularly including low-carbon generation and capacity requirements.
The hon. Member for Angus raised the issue of the strike price and new technology, and the shadow Minister mentioned carbon capture and storage. Understandably, questions will be asked about what strike price will emerge for such technologies. The strike price for new technologies will be set in a similar way to the renewables obligation and will consider levelised costs and hurdle rates, where necessary, to bring developments to fruition.
Competition is under way on CCS, but for less mature technologies there will be further analysis. Part of the competitive process in which we are engaged is a test of value for money. We will take decisions on an appropriate strike price based on an analysis of those projects, and that process will inform any further action. As I made clear both to the Committee and previously, I am very anxious that the process is as transparent as possible, and it will be subject to further scrutiny.
The information in the public domain thus far on CCS includes the report of the carbon capture and storage cost reduction taskforce, which suggests that competitiveness and value for money is indeed attainable in respect of CCS and, in its estimation, rather sooner than many people anticipate. The taskforce believed that CCS can become a cost-effective option; allowing that it is technologically sound, we are talking about commercial viability as early as 2020. We are confident about both the ability to set the right prices for those technologies as well as the transparency associated with that, and the cost-effectiveness that is critically important to make sure that viability means an effective roll-out of CCS with the consequent beneficial, virtuous effect in respect of gas and coal.
The process of collecting appropriate data has already begun with the Government’s system operator having issued a call for evidence in October 2012 to review technology cost and the deployment of potential assumptions, and to understand the difference in investment decisions under the renewable obligations and the CFD. Members of the Committee will remember that, while it is true that some eagerness was expressed in our evidence sessions about settling such matters, the broad principles of CFD associated with the strike price were warmly endorsed. Indeed, EDF and the renewables sector suggested that it would give a long-term certainty associated with the investment decisions that they wanted to make. EDF specifically made such a point. I recall that Vestas did, too.
The process has attracted pretty wide endorsement, but it is absolutely right that we are clear about the engagement in that process being subject to scrutiny and being as transparent as possible. The information obtained in the process, together with the existing renewables obligation data, information on the CFD terms and the impact on the cost of capital, will be used by the systems operator in its analysis. They will be published in or alongside the delivery plan that I mentioned earlier, which will be published in July and subject thereafter to consultation.
A final CFD strike price for renewables will be published by the Government in the first EMR delivery plan by the end of the year, obviously subject to Royal Assent and, where appropriate, in annual updates thereafter. The Government will also consider potential wider economic and environmental impacts where appropriate when making decisions on CFD strike prices for renewables. The clauses relating to the final investment decision-enabling process set out the principles governing the settling of strike prices for individual plant in the short term, as a result of which there is no need for such a proposal.
As for amendments 46, 47 and 48, it is correct that the reference price is an important part of the CFD provisions as we outlined in some detail in the CFD operational framework. However, it is a technical provision and we do not consider it appropriate for such a level of detail to be in the Bill. I assure members of the Committee that they will have the opportunity to scrutinise the provisions relating to setting a market reference price for CFDs as part of the secondary legislation process. I am absolutely clear about that. The desire to scrutinise the process properly is a legitimate expression that has been given form by the amendments, and I am determined that the process will be as transparent as possible, to use the same word as that used by the hon. Member for Rutherglen and Hamilton West to enliven his contribution to the debate.
We must not risk constraining the terms that can be included in a CFD, which is a private law contract, by specifying or defining them within primary legislation. It would not be appropriate for the Secretary of State to report to Parliament on the outcome of the reference price-setting process. As the reference price is expected to be linked to the price of electricity, it will be dynamic and vary on a like-for-like basis. We will not accept the proposal, not because we do not want to be transparent, but it would be so impractical because of the very nature of the dynamism of the reference price. That will administered by the CFD counterparty body in accordance with the proposed specified regulations. I trust that I have reassured members of the Committee that the House will retain appropriate oversight of the reference price without introducing onerous reporting requirements. However, I note that the hon. Member for Brent North requires further satisfaction.

Barry Gardiner: If I were looking for satisfaction, I would not be sitting here for six hours a day for the next few weeks. The Minister has really changed his view of what is an appropriate time, and I think he needs to acknowledge that to the Committee. On Second Reading, in response to my hon. Friend the Member for Rutherglen and Hamilton West, he said
“and we will certainly, in the spirit in which I intend to conduct the Committee, make available draft material of the kind that the hon. Gentleman described so that, I hope, all members of the Committee get the chance to shape the Bill, as he suggests.”—[Official Report, 19 December 2012; Vol. 555, c. 956.]
It is precisely that assurance that we have had before, so when the Minister now says that there will be an appropriate time later on, he needs to acknowledge that it is not just Members of Parliament who are concerned that we do not have greater clarity and that we are not able to debate the context in which secondary legislation will come forward; it has been put to us by Energy UK and the Low Carbon Finance Group that these are significant problems where the Government are not allowing proper parliamentary scrutiny of the Bill.

John Hayes: The hon. Gentleman did indeed require further satisfaction. Let me try to satisfy him, therefore. It is important that we make as much information available as possible. On his point about draft material being provided, I think I said this morning that I am always willing to look at that as closely as possible. I highlighted some of the things that we have published and, furthermore, some of the things we intend to publish during the passage of the legislation. He is right, too, that we need to be transparent about the mechanisms by which the analysis, following the research that is done to establish strike prices, is formed. I endorse that view.
I emphasise, however, the point I made earlier: because this is a significant change in the way that investment is funded, with all the long-term certainty—15 years—associated with that change, at the very beginning of the process, there will be, in a sense, a necessary degree of investigation and discovery both for the industry and, working with the industry, for the Government. When we have been through that process, which is, by its nature, in the case of a new technology, or a technology such as nuclear that is about to enjoy a renaissance, the subject of negotiation, the matter will settle to a much greater degree than perhaps the hon. Gentleman fears, although he may not fear it.
I am clear that I want to make as much information available as possible. I made the revised impact assessment available, and I think that my exact words on Second Reading, which I have plucked from my notes in response to the hon. Gentleman’s comments, were these:
“Let me say at the outset that we will certainly make the revised impact assessment available before scrutiny starts in Committee, and we will certainly, in the spirit in which I intend to conduct the Committee, make available draft material of the kind that the hon. Gentleman described.”—[Official Report, 19 December 2012; Vol. 555, c. 956.]
I insisted to my officials, frankly, that we made the impact assessment available because I wanted Opposition as well as Government Members to have maximum opportunity to look at the revised impact after the quad agreement on, for example, the levy control framework, because I knew it would have significance in terms of the analysis of the effects of the Bill. I will continue in that spirit, and I have heard what the hon. Gentleman and others have said. Secondary legislation will be consulted on during the passage of the Bill. I make no bones about that, and there is no alteration to my determination to ensure that it occurs.

Peter Aldous: The Minister may find me an easier person to satisfy than the hon. Member for Brent North. I take the opportunity to repeat, based on what we heard in the evidence sessions and on what I hear from industry in my constituency where about three wind farm applications are being worked up, that timeliness on the publication of the strike price is critical. The Minister has gone a long way towards addressing my concerns, and I am sure that he is very much aware that some important decisions will flow from those announcements.

John Hayes: I am grateful to my hon. Friend, and his intervention is useful. He underestimates the closeness of my relationship with the hon. Member for Brent North and, indeed, the regard in which I hold the Labour party—which I believe to be mutual. With those remarks and reassurances, I hope that the hon. Members for Rutherglen and Hamilton West and for Liverpool, Wavertree will withdraw the amendment.

Tom Greatrex: I thank the Minister for his words. I will make one observation, which is that I am relatively new to this game—to seeking to scrutinise Government legislation as effectively as possible. In all honesty, I am trying to do that to the best of my abilities, which I am sure goes for everyone on the Committee. The policy changes that we are discussing are important and significant. Not for the first time, we have referred to the Minister’s words on Second Reading and, in all candour, I am disappointed that he has not been able to offer any of the regulation, even in draft, because we will not get the opportunity later to scrutinise in the same way as we do in Committee. It is vital that we get the details right. The more gaps there are—we heard the evidence from those who came before us, at the start of this process—the higher the risk that investment will not happen, will be delayed or will cost more, all of which feeds through to the costs then paid by consumers and businesses, to which the Minister rightly alluded. I have heard what he said and understand the reason he has given, but I want to put on the record my disappointment that we have not been able to scrutinise some things to the degree of rigour that we would have liked had some of the information been available in draft.

John Hayes: Let me emphasise that, before the Bill, engagement with the sector, interested parties and expert groups was extraordinarily significant, with monthly meetings with relevant trade associations, energy firms, NGOs and consumer groups—we met on a regular basis. We created, as the hon. Gentleman may or may not know, expert groups for policy areas in EMR, feed-in tariffs, contracts for difference, capacity markets and judicial framework. We have been engaged with the Business Energy Forum, individual firms and business groups such as the CBI, in addition to the engagement that the DECC commercial team has had with the sector. In putting that on record, I do not want him to be under any misapprehension that there has not been a significant level of engagement with a range of interested parties to get the Bill absolutely right. That is the appropriate way to move forward. I hear what he says, but I would not want him to have a less than balanced view of our approach.

Tom Greatrex: I am grateful to the Minister for his intervention. I do not want to undermine any of that engagement. Industry involvement is vital, but we have a slightly different role—

John Hayes: Yes, quite.

Tom Greatrex: Which is scrutiny. My disappointment is that we have not been able to scrutinise some of the detail, and that the Minister has not been able to bring any forward for the Committee. I am sure that I speak for the whole Committee in that we wish to scrutinise in a responsible, sensible and sensitive way, to help to get the Bill right, because of its importance. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 7  - Payments to electricity suppliers

Alan Whitehead: I beg to move amendment 27, in clause7,page5,line27,after ‘suppliers’, insert—
‘(2) It is the duty of the Secretary of State to ensure that a CFD counterparty is able to meet its financial obligations under CFDs.’.
This is a fairly straightforward amendment, which I might describe as an Indiana Jones amendment. I am sure that the Minister will recall the sequence in “Raiders of the Lost Ark” where Indiana Jones is confronted by a flamboyant swordsman who shows great dexterity with his weapon, and Indiana Jones considers whether to take his sword out and fight him, but decides just to shoot him instead. This is an Indiana Jones amendment, because it does not go through lengthy processes to reassure those who are suppliers and are worried about whether they will get their money from the counterparty where that counterparty has acted in a perfectly straightforward manner but, because of circumstances beyond their control, may not be in a position to deliver all the reliable arrangements to the suppliers expected of them, and the certainty required of them.
We have already discussed various devices that could add to that certainty, including various regulations that might be introduced. The amendment simply says that it is the duty, one way or another, of the Secretary of State to make sure that the counterparty is able to meet its obligations. That does not mean that he is obligated to the extent of the arrangements relating to the counterparty effectively going on to the public books, which was the original position in relation to the counterparty. It does mean, however, that by various devices, the Secretary of State has to fulfil that duty. That payment may be achieved through loans or by other methods that the Minister has outlined. The amendment puts that duty on the face of the Bill, and makes it clear that the Secretary of State must meet it, and ought to get on with that. I think that suppliers would be reassured by that, and they would know that normal service would not be interrupted even if there were difficulties arising from other circumstances.
The amendment cuts through a number of rather roundabout routes that might otherwise be considered, and I commend it to the Minister. I am sure that he would be greatly relieved were such a simple device to be included in the Bill, because it would make his life a little easier. It would also make security in terms of working with the counterparty that much better.

John Hayes: I do see myself as a mix of Henry VIII and Indiana Jones. Remember that Indiana Jones was really only equipped with his ingenuity, a trilby hat and a whip.

Alan Whitehead: And a gun.

John Hayes: Well, he rarely used a gun. He took on everything from Bolsheviks to bandits, from Nazis to people from outer space with strange-shaped heads, and such is my mission in pursuit of virtue. I have a trilby hat, and I am not telling anyone whether I have a whip or not.
The hon. Member for Southampton, Test raises important matters relating to the confidence of generators that they will be paid. It is something that we have already discussed, and it is something that has informed consideration of the Bill from its draft stages. It is central to the Government’s purpose. Confidence is not merely about agreements on price, although that is vital, as we discussed earlier. It is also about confidence that the price will result in a payment, which is precisely the point that the hon. Gentleman makes. To that end, he is exploring whether further measures are necessary for the Secretary of State to ensure the solvency of the body responsible for making the payments. The CFD payments generators will of course be financed from suppliers, as he has already said, through the supplier obligation. That supplier obligation must be a robust mechanism to give generators the confidence that I have described.
We are indeed confident that the suppliers who can pay the obligation will pay. Just to put that in perspective, if they fail to do so, the fine that they would incur would be up to 10% of their turnover and the loss of their licence. In earlier consideration, I mentioned that the penalties were enforced by Ofgem and by regulations under clause 5. They will give the CFD counterparty the ability to pursue the sums owing of the debt. To guard against supplier default, the Government are taking further measures. Regulations under clause 5 will mean that the CFD counterparty will require suppliers to post collateral in advance of the upcoming payment, and I have already mentioned mutualisation.
The existing supplier of last resort regime means that customers can move from a failing supplier to an alternative, and the energy company administration scheme has been designed to deal with large supply default. Those measures will see the swift resumption of CFD payments. I am aware that the hon. Gentleman and the Select Committee have carried out detailed scrutiny. They felt that the system would benefit from some form of guarantee on top of the measures that we are putting in place. It is clear in the Bill that such duties are placed on the Secretary of State that if the supplier obligation is not a robust mechanism, the Secretary of State would be obliged to make it robust. There is an additional guarantee in the Bill. The only circumstances in which the supplier obligation could be designed to provide for less than the full amount of the CFD payments is where the Secretary of State otherwise secures the payments of such amounts or makes the CFD payment himself.
On that basis, and with those guarantees, I hope that the hon. Gentleman will withdraw his amendment.

Barry Gardiner: I do not quite see why the Minister is not able to accept the amendment. He said that there are other provisions in the Bill that, in one way or another, imply that this will be made right, but, as constantly happens with this Bill, we are left in a position where we are being asked to take things on trust. It is not a matter of whether the Opposition trust the Government—that is not the trust at issue here. The real point is that ultimately, somebody somewhere will litigate and this document, when it is passed into an Act of Parliament, will be the basis of that litigation. Therefore, it is essential that there is clarity about where responsibilities lie.
It is very clear that the Minister, or the Secretary of State, may make regulations about the amounts that must be paid by the CFD counterparty to electricity suppliers. What it precisely does not do is ensure, as my hon. Friend the Member for Southampton, Test has said, that the CFD counterparty is able to meet those obligations. Given that the Minister has been quite clear that it is his intention that the Secretary of State should ensure that the counterparty is able to meet those obligations, why do we not, as my hon. Friend was suggesting, just cut through the Gordian knot of this problem? We should not leave the issue to chance, or to the courts’ interpretation of what the Minister said in Committee or of the Act itself; instead we should make the situation absolutely clear, so that anybody can say, beyond any reasonable doubt, “We know what the answer is: the Secretary of State has an obligation to do it.” He can then get on and make the regulations that are necessary. That is the sensible way of proceeding in legislation.
Everything we are trying to do here is about instilling confidence in the sector, and creating clarity in order to instil that confidence, and incentivising through that confidence the investment that all of us agree is necessary to enhance the capacity of the electricity market. The Minister should accept an amendment such as this one; it does not seek to cut across the thrust of his intentions. He asked for good will, and indeed has said that there is good will on both sides; to a great extent, I think there is. But in that same spirit, when an amendment comes that is positively helpful to the direction of travel in which the Government have stated that they want to go—an amendment that avoids any doubt and creates greater certainty—surely good will means the Minister should accept it.

John Hayes: The hon. Gentleman deserves a further response. He calls for greater certainty; I have been very clear that in all circumstances there is a duty to ensure complete funding of CFD obligations. I have also made it clear that there are a number of measures that would facilitate that and that are robust. The hon. Gentleman was a member of the Select Committee; he will remember that the original discussion about this issue was about a further Government guarantee to underpin the process. The measures I have set out are a response to the call for a range of mechanisms by which the debt could be collected and for absolute certainty that it would be collected. To be very clear on that, the Secretary of State must ensure robust supplier obligations under clause 5(1), or else meet the payments himself under clause 123: so either he must put in place robust mechanisms to make the payments or he must make the payments. That is a pretty firm set of guarantees. Those measures are not about trust; they are a proper response to the scrutiny, and are detailed in the Bill.
There is an issue about whether a firm, explicit statement might be made. I will go away and think about that as a result of the amendment tabled by the hon. Member for Southampton, Test. That is a perfectly proper thing to do. But I must emphasise that the Bill makes it absolutely clear that funding of CFD obligations must be put in place by one of the means that I have outlined. On that basis, and given the further consideration that I will give to this issue, I hope that the hon. Gentleman will see fit to withdraw his amendment.

Alan Whitehead: I thank the Minister for his kind offer to go away and have another look at this issue. I think that would be a wise course of action, because of the difference between the position of the Government simply guaranteeing the whole issue on their balance sheets, which we know is not a retrievable position, and the need to secure the greatest degree of certainty that is possible. There are creative ways in which we can get close to that position, and the understanding of future customers, traders and developers as far as counterparties are concerned is something that we ought to try to seek clarity on if we can. I do not want to be in a position where we only get to know whether further measures are necessary once the CFDs are working and we have found that that certainty does not appear to be there for the market.
I welcome the Minister’s offer to look at the issue again, and I hope he will look at it in that constructive light, in order to get that certainty right for future operations. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Ordered, That further consideration be now adjourned.— (Joseph Johnson.)

Adjourned till Thursday 24 January at half-past Eleven o’clock.